What are the advantages, disadvantages and opportunities of Defi
While the traditional financial sector is exclusive and practically excludes people without a bank account, Defi does not have this access restriction. There are no opening times or regulatory restrictions, so financial services such as asset trading are possible 24/7.
Particularly high protection of privacy, as no personal data is processed by third parties, while at the same time high transparency thanks to publicly visible transactions.
By eliminating costly decentralized crypto exchanges intermediaries, costs for financial services can be reduced significantly, especially since the higher degree of automation enables fast processing. Like any new market that is still at the very beginning, Defi also offers particularly high return opportunities.
What are the disadvantages and risks of Defi?
Defi is still at the very beginning of its development so that consequently only a few empirical values exist and long-term observations have not yet been possible.
The smart contracts used can be faulty and thus become the target of hacker attacks, among other things, and the technical solutions are often still user-unfriendly and immature.
Investing in Defi – you have to know that
In the decentralized lending sector, in particular, i.e. lending, high returns are possible. By depositing and lending tokens at the same time, high returns have been achieved in the past. In principle, however, you only need to invest as much as you are willing to lose. To further reduce the risk, it is advisable to diversify your Defi investment capital across different protocols. Basically, the higher the risk, the higher the return. So when interest rates are very high, you have to be aware that the risk involved is also high. The speculation method of yield farming and liquidity mining has developed in particular.
Yield farming and liquidity mining simply explained
To generate particularly high returns, yield farming has established itself in the Defi sector. The principle is as follows: You deposit tokens as security and receive interest in return. In the next step, you can borrow part of the deposited amount yourself and log into other lending logs. This process is repeated over and over to leverage the capital invested and thus the interest earned. To further optimize the already attractive interest rates, liquidity mining comes into play in the next step.
To further increase the return, some protocols such as Compound (COMP) offer the possibility of liquidity mining. The network or governance token is reduced or generated when lending and lending or providing liquidity. Every time a user borrows or lends a compound, for example, COMP is distributed. Consequently, the goal of the Defi speculators is to generate as much COMP as possible. The effect of yield mining can be expanded to include additional price increases in the underlying token, which enables yields that are well above average. Of course, this is pure speculation with enormous risks.