Decentralized Finance [DeFi] is an open-source financial program based on blockchain technology. It operates independently but needs an internet connection. It aims to imitate existing financial products using blockchains’ decentralized protocols and smart contracts. Users can gain access to basic financial services like lending, borrowing, and investing without any interference from 3rd party financial intermediates.
For example, a cryptocurrency holder places their currency in a decentralized lending protocol for earning interest. The interest rate is higher than that deposited in the bank’s saving account. You can get a crypto wallet on ZenGo and earn 8% on your Bitcoins or stablecoins. It has solid security features like 3FA authentication, biometric encryption, and cryptography. Thus, the concerns of losing your NFTs and crypto are eliminated.
What’s a smart contract?
A smart contract is a written computer code agreement you execute on an open-source, decentralized, and permission-less blockchain. It is the core of the DeFi movement as they allow the protocols to function grounded on logic and code. The contract doesn’t need intermediaries and is irreversible. The first smart contract on blockchain was Ethereum, but many others have gained popularity – Binance, Cosmos, Solana, Algorand, etc.
DeFi has transformed into a multi-billion dollar market with more than $90 billion tapped in DeFi protocols. At the start of 2022, there were more than 655,000 daily active wallets. The DeFi movement is expanding and new protocols are developed to resolve the challenges of this new market model.
Current & future of DeFi
Currently experienced crypto investors are playing the field. The knowledge barrier is high but is anticipated to change in the future. Small businesses will successfully borrow cash at competitive rates from the DeFi lending protocol from their smartphone.
DeFi currently shows potential in the financial tech sector but has its obstacles. Ethereum is the foundation of the majority of DeFi protocols. The ledger may become unable to deal with high transaction processes at some point. So, the processing time and gas fees will increase on the Ethereum network. This means, the returns for a DeFi user to deal DeFi protocols are being diminished.
The Ethereum community is working hard to resolve this issue using network upgrades but the DeFi future will possibly be multi-chain. However, there have been other smart contract platforms like Binance, Algorand, Cosmos, etc. introducing competitive DeFi marketplaces similar to Ethereum.
Stablecoins are designed to handle the wild price fluctuations of cryptocurrencies that are pegged with fiat currencies. For example, if you place BTC in a lending protocol to yield interest then the possibility that its price will drop triggering a loss. On the other hand, if you used stablecoins Tether and placed it in a Tether wallet then the value of the underlying asset would be stable and market volatility would never impact the yield.
So, the easy and safe way to earn above-average interest in the DeFi market is to tokenize the dollars into Tether and deposit it in DeFi protocols. For more detailed information, you can visit ZenGo X. It is the best online resource for gaining cryptocurrency knowledge. Catch them up on LinkedIn and stay updated about the latest changes in the crypto world!