February 22, 2024
By Anjali Kochhar
Decentralized finance or Defi is an evolving model for organizing and enabling cryptocurrency-based peer-to-peer transactions, without third-party involvement like banks/ financial institutions.
Mr. Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth “The Decentralization of Finance is good for humanity and it’s ultimately a win for every one of us. Because now that we can circumvent banks, exchanges, and brokerage companies by using smart contracts on the blockchain… every person, every family, and every business will experience more liberty, more freedom, more opportunities, more abundance, more power, and more wealth.”
It is said the defi was born in 2009 when the first peer-to-peer transaction of BTC took place. Till mid – 2017, Defi was only used for crypto transfers and nothing much, but during Dec 2017 when MakerDAO protocol launched its stablecoin Dai, the entire ecosystem of financial transactions changed.
It is an Etherum-based protocol whose value is almost equivalent to One US dollar and creates digital assets as collateral. In Defi, there is no requirement to hold dollars in a bank, like one has to do for Tether-backed USDT.
In simple language, Defi Yield farming is where lenders or investors deposit digital assets in a DeFi platform or protocol to create a liquidity pool (LP) and earn interest or the fees on the deposit from the platform, as a return for the funds deposited. To keep the investment safe, it uses smart contracts (self-executed computer codes) where the deposited tokens are invested.
According to Grand View Research, a US-based market research company “The global decentralized finance market size was valued at USD 16.33 billion in 2023 and is expected to expand at a compound annual growth rate (CAGR) of 46.0% from 2023 to 2030”
To get a perspective on how profitable the Defi market is a few stats from Statista. The average revenue per user amounts to US$1,378.0 in 2024. The highest revenue is reached in the United States (US$12,530,000.00k in 2024). The number of users is expected to increase to 22.09m users by 2028.
Billionaire Mark Cuban mentioned that he is making a 206% return on one of his DeFi investments. He mentioned in his blog “In a money exchange business, or even a banking business, you have to have the financial depth to be able to offer the range of needed currencies and services. You need to be able to afford to hedge the risk of pricing volatility between currencies. If you want to do this business with scale, across the world, it can be very expensive and risky. Not for DeFi Exchanges. What makes running a DeFi exchange so much better than a traditional centralized financial business of this and any kind is that rather than the owners of the business, investors, and their creditors putting up capital for all the transactions to take place, Liquidity Providers do it for them”.
Another term one gets to hear in the crypto world is Defi Staking. Both Staking and yield farming are methods to generate wealth from crypto holding. Staking gives expectable but low rewards with risks of fixed lockup periods.
On the other hand Yield farming is a bit more intricate, and requires full-time management to manage the services, but as we all know, the bigger the risk higher the chances of bigger returns but the crypto market has a multitude of risks attached to it. Hence one should do a thorough research prior investing in the crytpo-based markets.
Some of the risks associated with yield farming, Rug pulls when the developer disappears with the crypto funds; Volatility due to the bear market; Smart contract risks from hackers; and Regulatory Risks.
Last year DeFi sees $760m wiped in crypto’s most common scam Rugs Pull. BALD token creator deposited millions of dollars of liquidity into its trading pool, a sign many took as evidence BALD’s creator was trustworthy the token rose a dizzying 3,000% hours after its launch. The next day, the BALD creator withdrew this liquidity, instantly crashing the token by some 97%.
The list of suspected Rug pull scams is endless Magnate Finance’s $6.4 million in August, Kokomo Finance’s $5.5 million in March, Xirtam’s $3.4 million, and Swaprum $3 million in May.
Mark Cuban further added,“That is not to say that every crypto blockchain or DeFi project will work. They won’t. These facts are not a secret in the crypto world. There is an incredible amount of competition. So much, in fact, many, if not most, will not work. They will not get enough users or generate enough fees to succeed. Crypto is brutally competitive. But in crypto vs. traditional, centralized businesses, all other things being equal, I’m taking crypto every time.”
The rise of DeFi signifies a paradigm shift in financial transactions, offering liberation from traditional institutions and unparalleled opportunities for wealth creation. Yet, amidst its potential lies inherent risks demanding careful consideration and due diligence.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
