TeaThe volatility of crypto markets has led many investors to largely ignore (or, in some cases, openly fake) the vehicle. But as digital currency moves closer to the mainstream world and more digital assets use some of the same tools as crypto, you might have decided it’s time to learn a little more.
There is a lot of mystery in it and even more buzz words. However, covering them all is the concept of Decentralized Finance or DeFi. Here’s a look at what that term means and what the risks and rewards are.
What is DeFi?
Decentralized finance is a catch-all term for any platform that uses blockchain and peer-to-peer financial networks as an intermediary to send or receive transactions. It is a high-tech alternative to human intermediaries that proponents say is fair and reliable. (However, there are many who disagree with that assessment.)
Why is it so important?
DeFi is how trades are made. But it is also a lending platform, an options market and much more – all in a decentralized format without red tape and regulations. Tradefi (Traditional Finance) Markets required to comply.
Basically, it takes the premise of a digital currency and expands it into a digital alternative to Wall Street, minus the traders and other expenses.
I heard the transactions are anonymous. is that true?
No. While there is some layer of anonymity (i.e. no individual’s name is involved in the transaction), all purchases and sales are traceable, as they are recorded in a ledger that can be accessed by anyone. Executives or bad actors with advanced technical skills can usually link trades to individuals, should they wish to.
How big is the DeFi market?
This of course is optional with the markets. By March 10, crypto markets were once again falling, with bitcoin falling below the $20,000 mark. reduced it DeFi Market Cap Up to $44.5 million, putting it among the top 50 banks in the world, but just barely.
Seems simple enough. Why are people worried about DeFi?
It comes down to regulation – or lack thereof. Mainly none of the usual safety and security measures that protect investors in other financial vehicles. It’s also a big fraud target over $10 billion in damage For hacks and other scams in 2021. And since the money isn’t insured, such as those covered by the FDIC, victims usually have few, if any, ways to recover their lost money.
Senator Elizabeth Warren (D. – Mass.), at the December crypto hearings DeFi is called “The most dangerous part of the crypto world.”
“This is where regulation is effectively absent, and – no surprise – this is where scammers and fraudsters and swindlers mix among part-time investors and first-time crypto traders,” she said. “In DeFi, one cannot even tell if they are dealing with a terrorist.”
Yes. So what’s the appeal?
For traders, it’s easy to jump in. There is no application process or paperwork. All you need to do is create an account and you are off. The notion of anonymity also appeals to some people.
Flexibility is one of the major draws for users. You can transfer the property at any time, day or night, without any fees and without waiting. And, proponents argue, it is better than the current banking system whose code is not up to date. Those same evangelicals often believe that a decentralized financial system can be a remedy for the power of big banks.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.