In 2020, interest in DeFi took off, with the amount locked in DeFi protocols skyrocketing to almost $15 billion at the end of the year, from merely $700 million in January. When the world was distressed with COVID19 and its economic impacts, the blockchain space caught the DeFi bug, with crypto users heavily taking part in lending protocols, borrowing stable coins, and mining liquidity.
Generally, DeFi took center stage conversation throughout 2020, gaining momentum in February as the Total Volume Locked (TVL) protocols exceeded $1 billion. With the continued bullish price action in cryptocurrencies at the start of 2021, this year could bring more interest and development in DeFi. This is article examines whether DeFi provides a suitable infrastructure for holding and managing investments in 2021.
What is DeFi?
DeFi is an abbreviation for “decentralized finance,” an umbrella terminology for multiple blockchain financial use cases geared toward disrupting financial intermediaries.
Just like traditional investments, decentralized finance is centred around a contract. However, DeFi uses smart contracts- computer codes that automatically execute the terms of an agreement. The companies that provide DeFi services also resemble traditional banks to some extent. But since DeFi is decentralized, these businesses differ from their conventional counterparts in the following ways:
- Minimum paperwork and compliance requirements.
- Accessible to investors from any part of the world
- More transparent and secure transactions because of blockchain technology.
- Blockchain makes things even better.
As attractive as these factors appear, you should not solely depend on them when investing in DeFi. In the long run, consider Return of Investment (ROI) before investing your money in any DeFi project.
The Benefits of Investing in DeFi
While DeFi is still a new blockchain use case, there are multiple benefits it gives to users. Most crypto enthusiasts describe it as an ambitious attempt to decentralize legacy financial applications, like wealth management, insurance, payment, trading, investment, trading, and borrowing. Some of the primary benefits of decentralizing the financial system include:
- Censorship resistance
- Reduction of transactional costs
- Global participation
- Elimination of third parties
- True decentralization.
Investing in DeFi- The Four Primary Steps
- Set rules defining your investment. State how much you will invest, when to invest, the investment criteria, the minimum market cap, benchmark, and so on. These measures will equip you with essential knowledge that will help you to thrive in the DeFi world.
- Discover and comprehend the common DeFi funding and investment tools.
- Go right ahead and make your investment.
- Monitor your investments.
DeFi presents numerous investment opportunities, such as savings accounts, crypto-backed lending and borrowing, and stable coins. Besides, it generates better interest rates than the traditional financial system. For example, stable coin lending interest rate ranges from 8-12%. Some DeFi platforms have saving accounts for their customers with interest rates of up to 10%.
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