DeFi is the acronym for Decentralized Finance or the offer of a series of financial services, which by exploiting the potential of platforms and protocols that allow the automatic execution of smart contracts (Erc-20 or BEP20), eliminate financial intermediaries such as centralized exchanges and thus offering the possibility to the individual user to be able to earn using their crypto.
Among the most popular decentralized finance projects we find:
DEX: decentralized exchanges that allow users to trade currencies with other currencies without intermediaries and almost anonymously (KYC processes are not necessary).
stablecoin: through these decentralized applications a user or a company can generate a new stable cryptocurrency linked to another asset, DAI using ETH or USDT using the dollar $ are two examples.
Lending platforms: These platforms use smart contracts to replace intermediaries such as banks and on which cryptocurrencies can be lent or borrowed
Wrapped Tokens: these are cryptocurrency tokens anchored to the value of another cryptocurrency. It is called a wrapped token because the original asset is placed in an envelope, a kind of digital vault that allows you to create the wrapped version on another blockchain.
Currently, through decentralized finance, we can create virtually and easily wrapped tokens on any asset.
The first and famous wrapped token is the famous WBTC
Yield farming: platforms, about which I wrote about in a previous article (What is yield farming), that allow traders who are aware and willing to take the risk of earning higher returns from their cryptocurrencies.
What risks are there in investing in DeFi platforms?
The risks involved in investing in decentralized finance platforms are of different types:
- risks on the smart contract:
errors, bugs and other unforeseen inconveniences in the smart contracts that regulate the functioning of the platform can cause real financial damage. These risks can be reduced through proactive code audits and formal audits by reputable companies
which certify that the lines of code with which the smart contract was created do not contain errors. Certainly the DeFi platforms that have obtained a favorable audit are to be preferred to those that have not
- financial risks:
liquidity of the pool, impermanent loss, fluctuations of the cryptocurrencies in the pool. You risk less by participating in those pools where the impermanent loss is almost non-existent or those on the stablecoin market
- other risks:
hacker attack; invest in platform developed for the sole purpose of scam
What returns can be obtained by investing in DeFI?
The expected returns by investing in DeFI range from a few percentage points, from 1% to just over 10%, for those who invest in safe projects such as MakerDao, Compound, Uniswap and AAVE, to stratospheric returns (more 1000%) by investing in new little-known and not safe at all liquid platforms.
In conclusion, in finance, no one gives anything away and large returns can mean great risks up to the point of losing all of what has been paid!
An interesting website that compares the most important platforms by giving them a comparable score that measures the risk of the platforms, based on factors such as smart contract, centralization and financial risk: https://app.defiscore.io/platforms/aave
Disclaimer: This article reflects its author’s opinion only and is not financial advice!
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