Did you know that the average American has approximately $5,000 in savings? As time goes on, though, people have begun to explore alternatives to conventional banking. Decentralized finance (DeFi) is one of the most important opportunities to keep in mind, but not everyone understands what they should about it.
Let's take a look at the DeFi trends you need to know.
So, What Is DeFi?
In short, it's the process of moving financial services and products away from central points of control. This can be done through decentralization on a blockchain or even through peer-to-peer interactions that don't require a third party. When you think about DeFi, it's helpful to consider all of the different ways that you currently interact with centralized financial institutions.
These include banks, lenders, and even investment firms.
How Can I Get Started With DeFi?
You could use a decentralized exchange to buy and sell cryptocurrency.
Another popular option is to participate in initial coin offerings (ICOs) or token sales. There are also decentralized lending platforms that can be used to borrow money in cryptocurrency.
These platforms usually require collateral, and they use smart contracts to enforce the terms of the loan. When leveraged correctly, these platforms can be a great way to gain access to the capital you need.
What Are the Benefits of DeFi?
Primarily, it offers a high degree of security. When you use a centralized financial institution, your funds are stored in that institution's central server. This means that if the server is hacked, your funds could be stolen.
With decentralized finance, your funds are stored on a blockchain. This makes it much more difficult for hackers to steal your funds because they would need to gain access to the entire network in order to do so. Another benefit of DeFi is that it offers a higher degree of privacy.
As previously mentioned, lending and borrowing money are also much safer when using DeFi.
Make sure that you understand the privacy policy of a financial institution before you use it, though. This will help provide insight into what you can expect from working with them.
Are There Any Risks I Need to Be Aware Of?
Yes, there are always risks associated with any financial decision that you make. When it comes to decentralized finance, one of the biggest risks is the volatility of cryptocurrency. You'll also need to consider factors like custodial risk, environmental risk, and regulatory risk.
Custodial risk is the risk that your coins will be stolen on an exchange. Environmental risk is the risk of loss due to things like floods or fires. Regulatory risk is the risk of changes in government policy that could adversely affect your business.
Understanding Decentralized Finance Is Easier Than It Seems
Although decentralized finance may seem complex at first, it's actually quite simple. Be sure to keep an eye on these DeFi trends so that you can take advantage of this opportunity.
Want to learn more about how you can get started with DeFi? You can read our article "How to Earn Passive Income Through DeFi".