The Rise of DeFi: Trends and Opportunities
With over 18,000 cryptos to choose from, where do you put your money? DeFi is a fast-growing crypto sector you should know about. Offering a whole new way of doing business online, DeFi has been called the ‘biggest thing in the history of finance.’
The total value locked into DeFi projects has rocketed from $1bn to over $70bn in the last two years. And experts expect the sector to carry on growing fast. That is because DeFi (Decentralised Finance) offers companies and individuals new ways to lend, borrow and exchange money that are faster, more efficient, and ultimately more rewarding than traditional finance (TradFi) can offer.
Top tip: you can buy a DeFi crypto to engage with its financing opportunities or you can simply buy it as an investment.
Because most DeFi applications are based on the flexible Ethereum blockchain, developers can use DeFi like ‘money lego’ to build specialist financial applications. Thus the building blocks exist to overcome any problem and seize any financial advantage. This flexibility is why the DeFi sector has such a bright future: some analysts predict that, one day, all financial operations will be conducted using DeFi DApps.
But DeFi is not just for ‘crypto-natives’ working in blockchain economies.
With just a crypto wallet, anybody can access DeFi tools like crypto staking (where you lend out your own crypto for a fixed period in return for interest) or crypto loans (where you borrow crypto).
The best news for investors is that you can benefit from the expansion of the DeFi sector without getting involved in the technicalities at all. Each DeFi crypto relates to a particular DeFi operation, just as a conventional stock ticker (AAPL) relates to a particular company (Apple). So simply invest in DeFi crypto as you would with a conventional stock.
For example, here are three popular DeFi crypto:
Terra (LUNA)
Terra is a system of stablecoins. Stablecoins are crypto that are pegged to the value of the US Dollar. LUNA, with a market capitalisation of $33bn, is the native crypto of Terra. Terra received $1bn of venture capital funding in February 2022, and the value of LUNA hit an all-time high of over $100 in March 2022.
Aave (AAVE)
With a market capitalisation of just under $2bn, Aave is a DeFi system that provides liquidity pools for lending and borrowing. Aave specialises in ‘flash loans’. These allow users to borrow crypto for literally minutes at a time.
Uniswap (UNI)
Uniswap, with a market capitalisation of over $8bn, is a decentralised exchange (DEX) where people can swap DeFi tokens. Uniswap uses an automated market maker system to match buyers with sellers.
The future of DeFi is likely to follow two positive trends:
1. DeFi products will continue to offer far better yields than banks
Inflation is running at an 8-year high in Singapore, and at a 40-year high in the US. The value of cash therefore erodes over time. But DeFi has an answer: some DeFi staking projects offer guaranteed yields of 15%, compared to conventional bank interest rates of 1%.
2. Flexible DeFi programming means problems can be overcome
A big issue during 2021 has been high ‘gas’ fees for Ethereum. That means it has cost a lot to move Ethereum around. This is being tackled by Ethereum’s move to Proof-of-Stake protocols, as well as by numerous ‘Level 2’ blockchain systems like Polygon (MATIC) offering quicker, cheaper solutions.
Which of the 500+ DeFi crypto do you choose?
This is where investment robots come in. Robo-advisors can take the tough decisions for you. Computer algorithms can make you profits at times of high volatility (when prices leap up and down) as well as pinpoint DeFi crypto which are good bets for the long-run.
Ultimately, all investment decisions boil down to your own unique risk profile. If you have a high appetite for risk, for example, this means you are prepared to risk heavy losses in pursuit of stellar gains.
Pinpoint your exact risk profile by using TradeTogether’s 2 minute test. There is no obligation, and you may be surprised by the verdict!
