Decentralized finance (DeFi) is an emerging digital financial infrastructure that essentially eradicates the need for a central entity to approve financial transactions. Domenic Carosa and Dan Schatt from Earnity believe DeFi is an umbrella term for a new wave of financial services innovation.
DeFi inextricably links with blockchain, the decentralized, immutable, public ledger on which Bitcoin depends, that allows a network’s computers (or nodes) to keep a copy of the history of transactions. In other words, the idea is that no single entity has control over or the ability to alter the transaction ledger.
How Does It Work
DeFi provides financial services using cryptocurrencies and smart contracts, thus eliminating the need for intermediaries such as guarantors. In addition, it is open-source, which means protocols and apps are theoretically available for users to inspect and improve. As a result, by developing their dApps, users can mix and match protocols to unlock unique combinations of opportunities.
How Do People Make Money
More and more people today are trying to capitalize on the growth of DeFi in various ways. For example, you can use Ethereum-based lending apps to generate a passive income. Another strategy is yield farming, a riskier practice that more advanced traders use. Employing this method, users scan through a plethora of DeFi tokens in the hopes of finding opportunities for higher returns, but it is a complex process and can lack transparency.
How Risky Is It
DeFi, like all other new decentralized blockchain networks trading in cryptocurrencies, is extremely risky, especially given that it depends on a new technology that aims to disrupt an established institution such as a centralized bank. It’s even more risky, not to mention difficult, for newcomers enticed by yield farming and passive income potential profits.