Decentralized Finance (DeFi): Imagine if you could have complete control of your assets, no banks or governments in between (for the most part). Achieving true freedom thanks to thousands of other people making a decentralized financial system run on supply and demand.
DeFi was one of the first use cases for crypto, ever since Bitcoin popped into the scene, people have been wondering what could be achieved if we actually let the market decide what happens to our finances, with no insiders or institutions manipulating the flow of capital.
In reality, the truth is much more nuanced than it may seem. True, having verifiable ownership of your assets has enormous perks. But the promise of “no middlemen and no insiders” has been really put to the test when regulations aren’t in place.
Still, handling your crypto assets through decentralized means offers a lot of benefits when compared to the downsides of banks and financial institutions:
- You get sole ownership of your tokens: We’re not talking about illicit assets here, but everyday people trying to get more bang for their buck, literally. When transacting with decentralized finance applications, the chances of your assets being frozen for obscure reasons, or businesses geo-blocking you are pretty much null.
- Incentives are high: With no commissions to be paid to middlemen, lower operational costs overall and direct peer-to-peer trades; DeFi platforms can affor to offer you much higher returns on even the safest investments when compared to traditional institutions.
- Human bias is significantly reduced: Smart contract really are revolutionary. By applying this miraculous technology on financial exchanges, you can be assured your transactions will send back exactly what you traded for (which sometimes can lead to a monkey-paw scenario), and liquidity pools offer a more secure alternative to personally trading your tokens with other people.
Keep in mind, there’s somewhat of a learning curve to DeFi, being the only person responsible for your finances means there’s no safety nets either. If you chose to connect your wallet to the wrong smart contract or trust fishy websites promising unheard of returns, chances are you might get rekt.
How to Safely Participate in DeFi Protocols
DeFi gets a bad rep for being complex and sorta dangerous. In truth, it’s all a matter of how you approach the space, the promise of free money does attract a lot of the scammer crowd to DeFi. But if you know to keep a cool mind and exercise some critical thinking before connecting your wallet, you’ll be safe from most of the dangers out there.
- Know the Founders and Team: After the Terra/Luna fiasco and plenty others, it’s easy to forget how noteworthy of a figure some of these founders are. There’s truly no way to predict how people are going to react when things take a turn for the worse, but a quick scan through crypto twitter will help you filter out 90% of the scams. Also, the best DeFi projects are often DAOs, not lead by megalomaniacal figures or cults of personality.
- Trust the Established Players: Aave, Uniswap/Sushiswap, Curve; there’s a lot of trusted players in the DeFi scene. These platforms often pioneered their respective niches within the industry, and they’re dang good at what they do. Whenever in doubt, trust the established players.
- If it’s too good to be true… Then it probably isn’t. Any project offering you +1000% returns on your investment is usually looking to use you as their cash-out. There’s good enough yields to be made with more conservative investments, don’t let your greed get the best of you.