So what is DeFi, and what are the Ethereum price predictions? DeFi (Decentralized Finance) is a segment of cryptocurrency, which includes projects related to decentralized finance. The development of DeFi projects led to the rapid growth of the cryptocurrency market in 2020. The segment, which currently includes more than 250 projects, has quickly carved out a niche on par with stackable coins and decentralized autonomous organizations (DAO).
While traditional financial institutions, such as banks, provide financial services under the control of a manager, DeFi projects allow community members to perform financial functions themselves, without any manager. Imagine that a car repair loan is given not by a bank in the full amount, but by all residents of the city, with everyone giving some insignificant pennies. This is what a DeFi project would look like in the real world. Now via DeFi you can trade cryptocurrencies (Uniswap), issue stable coins (MakerDAO), insure risks (Nexus Mutual), lend (Compound), and all this without a central intermediary.
What you should know about DeFi
The rapid growth of decentralized exchanges (DEX) has led to the release of a large number of new tokens. Most DeFi tokens are based on Ethereum, but some projects use other blockchains as well. In 2020, DeFi was as much a growth driver as the ICO in 2017. But while the ICO was a way to raise capital for the cryptocurrency market, DeFi is the very implementation of financial market functions.
You can find the state of the market for DeFi projects at https://defipulse.com/, here you can see the total volume of the market and a list of projects with categorization. There is another important difference between DeFi and ICO. Whereas in an ICO the market volume was measured in investments raised, for DeFi we are talking about the volume of funds in smart contracts and the value of the tokens. Credit protocols in DeFi projects work through a pledge, which secures the operation of the project. The pledge is a necessary measure because of the anonymity of network participants.
What is also interesting is that the project participants themselves manage the project. Usually this does not happen in the early stages of project development, when the developers retain control, but then the users get the right to vote based on tokens.
The main functions of DeFi projects are:
- Loan and Credit;
- Decentralized Exchanges.
How to make money from DeFi?
There are several ways to make money in this market:
- Compound and other similar projects, allow you to earn by putting cryptocurrencies on your own platform. These assets are lent and gradually generate passive income, which can be estimated in the range of 10% per annum.
- Trading cryptocurrencies on DEX exchanges can be more profitable for those who are good at trading. DEX is less liquid, so cryptocurrency price fluctuations can be even greater than on centralized exchanges.
- Farming and mining on liquidity are possible – risky ways of investing, where you put your assets into a project to increase its liquidity.
- Trading managing tokens. These are tokens that are used to manage a DeFi project. The price of such a token is volatile and can change a lot.