As great as financial institutions and Fintech were, we now look to the future. Since the debut of DeFi, it has proven to be a force to reckon with; DeFi is a Blockchain-based finance system that allows anyone to get quick access to loans or send money online without a middleman. It is a great pleasure to share this write-up with Web3 and Blockchain Technology enthusiasts and also those who are in the DeFi ecosystem. If you don't know what DeFi is, I will give a quick explanation in the next section.
What is DeFi?
What a journey it has been! DeFi is finally where it belongs. DeFi stands for Decentralized Finance, and it exists to organize and enable crypto-based transactions, exchanges, and financial services. One major advantage of the decentralized financial system is that anyone across the world can easily buy, sell, and trade their crypto assets without any hassle. Not only can individuals buy, sell, or trade, but DeFi also allows for the borrowing and lending of funds as well.
An Example of a DeFi System
Decentralized Finance has been around for quite a number of years now; owing its existence to the launch of the Ethereum blockchain sometime ago in 2015. Many DeFi protocols, such as MakerDAO, have impacted the world positively.
The Risks of Investing in DeFi
Many people believe DeFi will save the financial world while solving some of the most pressing challenges traditional finance faces! But not so fast. There are still some likely risks that DeFi systems or protocols currently face; they include :
1. Smart-Contract Risk:
The blockchain smart contract is a set of written programs stored in a blockchain. The smart contract performs all the on-chain transactions without any external involvement or time loss. It is worth mentioning that the blockchain smart contract is written by humans and may include errors If there is any loophole in the smart contract code, hackers or intruders will take advantage of it. They can vandalize the whole system and perform malicious acts that can lead to losing users' funds.
2. Oracle Risk:
Oracles connect blockchain smart contracts with the outside world for feeding information. Oracle risk is another significant risk DeFi systems may face. If the Oracle connection is disrupted or fed with malicious information, it can cause a disruption in a transaction process or an error. In these cases, the contract may fail in the process.
3. Custody Risk:
The term "Self-custodian" is an idea that users protect the private keys to their crypto wallets without any assistance from a third party. Truth be told - if you lose your private key, your crypto assets are gone. Early this year, I won the "PoolTogether Origin Story Bounty." My article was selected after the community votes, and the reward token ($159) was sent to my wallet. Unfortunately, I couldn't remember my recovery phrase, and that's how I lost my first earnings in the Web3 space. It was such a horrible experience, but I'm grateful for where I am today.
The Rewards of Investing in DeFi
1. Fast and Easy Accessibility
A significant hurdles Fintech and financial institutions encounter daily is the delay in transactions. This may be a result of bank network failure in the banks, and it takes several days to receive the money transferred from third parties. Besides this, the requirements for opening and maintaining some accounts can be tedious. Not to mention the processing period of cross-border payment.
In DeFi, it is dramatically different; creating a wallet address is so easy. Most times, you don't need anything to open a wallet except maybe your email address. The best part is that you fully control your wallet and funds for decentralized wallets. You don't need to go through a complex account opening process to carry out transactions. You only have to connect your wallet to a decentralized exchange (DEX), and boom! You're ready to do your transactions. Indeed, this is the future of Web3, and it will truly change the game.
2. Transactions are Transparent:
Transactions on blockchain's are transparent to the public while maintaining a pseudo-anonymous state. This means that all transactions are available to the public, but the identity of the wallet addresses is hidden. Your wallet is identified by a string of characters (public address), so nobody can identify it without you revealing them. So, while all transactions are available and transparent to the public, the identity of the users is not.
For example, the Ethereum blockchain accounts for over 90% of all DeFi traffic. All transactions on the Ethereum blockchain can be broadcast to and verified by users in the Ethereum network; this is made possible so that users can view network activities.
3. Open-source Interface:
Ethereum and many other Web3 projects are built with open-source code - anyone around the world can view, audit, and build on it. The open-source Interface allows developers to smoothly connect several DeFi apps, enabling them to deploy and create new financial projects without any restraint.
4. Trustless, Permissionless, and Decentralized Systems:
Decentralized Finance upholds the ethics of trustless, permissionless, and decentralized systems - anyone, regardless of where they come from, can borrow or lend funds without seeking permission from the government or any intermediary. That's the awesomeness of the Web3 space.
Final Thoughts: The Risks and Rewards of Investing in DeFi
I strongly believe that DeFi will forever change how we borrow loans. DeFi protocols allow anyone to easily access loans while fostering finance and crypto assets across a permissionless, trustless, and decentralized future.
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