DISCLAIMER: I am not a financial advisor. All contents on this blog are solely my own personal views and for Cryptocurrency Trading education/entertainment purposes only. Cryptocurrency Trading is very risky. Losses can exceed deposits. Enter with discretion.
Flyday Friday today! I am wishing each and everyone of you a very great day wherever you are in the world right now.
The topic that came into my head today is all about this hot trend right now. Almost every crypto enthusiast wants to join this popular money craze! As the popular saying goes, "when money talks everybody listens."
But I am not the type of person that immediately jumps into the train just seeing everybody is doing it. It doesn't mean that when everyone is doing it, it is right. I like Martin Luther's saying, "God plus you is a majority."
What I do is this, research first and research again. ;-)
If you still don't get it, then repeat until you finally grasp the idea.
Let's move on. I am talking about the frenzy trend lately called Decentralized Finance or simply abbreviated as the DeFi.
I am not going to write an another mind-boggling article explaining the details about it like we are seeing over the internet and on YouTube videos. I know that you are tired of endless reading and researching like I do. ;-)
I am just going to write simply and plainly in layman's point of view about the DeFi thing.
So sit back, relax and let me entertain you with my creative yet informative writing.
Are you ready? Let's get it on!
What is DeFi?
As I mentioned earlier, it is the short name for Decentralized Finance and can be in forms of decentralized applications or currencies. When I say decentralized, it means no entities nor individuals that control them.
DeFi is exactly the opposite of the Centralized Finance system or the traditional, old-school style, out-dated system that the world is using right now.
Are DeFi cryptocurrencies?
My answer is YES and NO.
Yes, like I said and based on my research, they can be in form of digital assets. One example of DeFi cryptocurrencies are DAI stablecoins and Uniswap smart contract coins.
What are the DeFi components?
There are 3 building components of the DeFi system:
• Cryptography
• Blockchain
• Smart Contracts - special mention here, this is the main building block where Ethereum ecosystem shows up as the rising star of the DeFi applications. It is solely because Ethereum is the most developed ecosystem to create smart contracts. Self-explanatory on point, if Bitcoin is the pioneer of all cryptocurrencies so Ethereum is the foundation of all smart contracts inspired cryptocurrencies, ecosystems and applications. Period.
In fact most DeFi apps are built with the Ethereum ecosystem!
How money is being made when using DeFi?
Okay this is where the real deal is, remember this first:
"One must put money in order to make money."
Sons and daughters, there is no such thing as free money even in the DeFi!
Now I will cite an example. Please pay attention closely so that you will get the insights.
Suppose "Joe" wants to start up a retail commodity business. The first thing he needs is some capital. So what Joe does is he will go to a local bank in his place, he discuss what he wants to the bank's representative. He wants to borrow some money as his capital. In short, Joe is applying for a loan. Now, do you think the banker just automatically approve Joe's loan request. No! Yes you are right, nice thinking! I like that.
The banker will thoroughly ask Joe for a collateral, it means if things go wrong, how can Joe pay back the loan with interest that he agrees with the bank? So Joe will give some of his assets as collateral. They can be his car, his land with title, his home, or anything that bank sees with value.
So they agree, Bank is happy because Joe has collateral to back him up for his loan. And Joe is happier because he has the loan now that he wants. Of course Joe will pay interest rates as part of their agreement. etc, etc.
This is the example of a traditional Centralized Finance system in action.
Now this same thing applies for DeFi as well. The good thing about DeFi system is they are decentralized, easy folks. In short, the DeFi system will only look into a crypto enthusiast digital assets.
If a person wants to earn some bucks by lending his Ethereum coins to a DeFi system of his choice, he will send those ETH to them. Given the fact that he trusts them. This action is called "Staking". It is one of many ways to earn money from joining DeFi systems.
The good thing about DeFi is they will give higher interest rates (higher payout returns) VS any the traditional banks/financial institutions can offer.
But, there is a big "but". There are risks, yes there are always even joining DeFi. That is the hard truth, risks in DeFi are unavoidable because they are 100% most of the time correlated with cryptocurrencies and we all know that digital assets prices are highly volatile. With that being said, prices can go down anytime and can go down even lower. I just wish the prices just go up all the way and that would not be an issue at all!
Let us do some simple flowchart to understand the risks found on DeFi:
Your money in US dollars purchased Ethereum coins (take note of the original value in US dollars) -> You stake your purchased Ethereum coins into a DeFi system of your choice (You swap ETH to Uni coins where the famous swap term comes from) -> If prices of the DeFi Uniswap coins go high then you earn/gain profits, if prices go down, the reverse will occur -> After the DeFi Staking period is complete, you swap back the Uni coins into ETH then sell ETH back to US dollars ->check your final money converted into US dollars if you have made some gains or losses.
What are my personal views on DeFi?
I view DeFi like the rest of crypto assets along my XRP holdings as a bubble. When I say bubble, there is no guarantee that I can make some profits and like I mentioned above, risks are inevitable/unavoidable.
Read again my disclaimer above!
So that's it. I already cited a concrete example of DeFi application VS CeFi (Centralized Finance).
I hope you have learned some information about DeFi.
Thanks a lot for reading until the end!
God bless and God speed!
