It all started with the cryptocurrency boom in recent years, but blockchain technology is much more than just investing in digital money. A slew of new crypto projects have emerged, trying to capitalize on what has become known as the “decentralized finance” movement, or DeFi.
Is DeFi putting your traditional money and investments at risk? Mostly not. But it is nonetheless an important technology that could revolutionize financial markets and services in the coming decades. Here’s what that means for you personally.
What is DeFi?
In simple terms, DeFi refers to the digital financial exchange without an intermediary. Using blockchain technology (a software-based ledger system distributed among the owners of a digital token or currency based on the blockchain), two or more parties can carry out a business transaction without the participation of a bank or financial institution. When cryptocurrencies are used to complete an exchange of value, the transaction is completed without any fiat currency being issued and distributed by a federally governed central bank.
So what’s the big deal? The different parties involved in DeFi have their reasons for using it. Some are tired of the government-controlled financial system and are looking for ways to disrupt the status quo. Others see a more efficient and affordable financial system that works better with the digital economy, which often eliminates slow and expensive intermediaries (payment is made in one way or another to every party that touches money or participates in a transaction). Given the huge and growing size of the digital payments industry (trillions of dollars are changed every year), other DeFi projects are simply trying to get in on the action.
Whatever the reason, many DeFi projects have popped up in recent years. Some are only aiming to take advantage of the cryptocurrency boom and have limited advantages, but others build actual financial services (such as payments, loans, and other banking products) built on the blockchain network such as Bitcoin or Ethereum (CRYPTO: ETH). Ethereum is a particularly popular platform for DeFi services, with a 66% share of the current DeFi market based on the total value invested in these projects. However, it’s still early days for the DeFi movement, so it’s not going to completely revolutionize the global financial framework anytime soon.
Embark on Your DeFi Journey
But what does DeFi mean for your investments? One of the core principles of investing is to accept that the economy and the business world are constantly changing, and the immediate effects of DeFi can be on businesses in the larger field of financial services. Many of these companies are based, such as VisaAnd Master Card Credit Card, And PayPalThey are already experimenting with blockchain technology in some way to keep up with the times.
However, the crypto and blockchain world is rapidly evolving, and some companies are pushing for change sooner rather than later. Mixing up some of these potentially disruptive stocks in your investment portfolio can help prove your money in the future. to forbid (formerly Square), ID pads (formerly Facebook) and Coinbase Global (formerly known as Coinbase) are just a few ways to bet on the future of blockchain and financial services.
Then there is investing in cryptocurrency directly, which has paid off well for some in recent years. Additionally, owning some cryptocurrencies that use the proof-of-stake concept to verify transactions (such as Ethereum) gives the owner the ability to directly participate in DeFi projects by betting (the computing process of transactions) and earn rewards for doing so (a kind of passive income akin to earning dividends from shares). The bonuses paid for some cryptocurrencies can be profitable, but remember another basic investment principle: more rewards means more risk, or uncertainty about the future value of your investment.
DeFi is an exciting new frontier in financial technology, that can reshape financial services and markets. But this movement will continue over a long period of time, probably decades, so your money and investments are in imminent danger. However, there could be a huge return if DeFi projects start disrupting the status quo. Take a thoughtful approach to investing in DeFi, and don’t try to chase fleeting fads and get-rich-quick schemes.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.