Investing in cryptocurrency is probably the most popular topic right now. It’s probably one of the key components in generating passive income.
Besides that, DeFi will probably win the word-of-the-year award in the crypto world. It sounds very obscure and resistance-y, but it’s nothing as belligerent as you imagine.
DeFi is an abbreviation from decentralized finance – and that’s a favorite tune in the crypto world. By comparison, almost anything related to the traditional financial system is deemed outdated and undesirable.
From what we’ve seen so far, DeFi gains more ground as the traditional system loses it.
Does that mean DeFi will crash the current financial system like David maimed Goliat? It’s difficult to say with certainty, but gauging the pros and cons is undoubtedly intellectually stimulating.
But you’re not here just for those exciting deductions. So, let’s find out if it’s worth getting involved with DeFi. We’ll explain decentralized finance, what you can do with it, and the associated risks.
Table of Contents
So, What Is DeFi?
DeFi, aka Decentralized Finance, is a movement that tries to give more autonomy to investors.
Basically, if you want to invest your money now, you have to go through any third parties, authorities, and bureaucracy. Some of those include banks and insurance agencies.
DeFi proposes an alternative investing system, where people transact between themselves.
The main advantage you can notice is less bureaucracy and less money spent on commissions. As a result, your profit can grow unhindered. Besides, “the system” won’t track your transactions because they’re encrypted.
How does DeFi allow you to transact directly with other people?
The keywords here are “blockchain technology” and “crypto.”
So, everyone on the DeFi market has autonomous public accounts recorded in an encrypted code. So, every other user can see your account, what you own, and the transactions you’re making.
Banks and brokers won’t profit from your transactions.
The system is more transparent and secure.
You’ll mostly transact with crypto.
DeFi Vs. Traditional Finance With Examples
The traditional finance system is centralized. Therefore, it’s controlled and regulated by authorities around the world, such as governments and banks.
For example, our Monetary Authority of Singapore is very hands-on with the current conventional system.
You want to take an HDB housing loan, so the first thing you check is the eligibility conditions set by our government. Then, you can only access a specific amount based on that HDB’s apartment market value, your family’s size, income, and credit score.
Of course, you have to consider the Total Debt Servicing Ratio currently at 60% in Singapore and the Mortgage Service Ratio at 30%.
Regular customers can’t go around these conditions.
The same statement is valid for investments. You can’t start trading without first opening an account with your local bank or a brokerage agency.
You can’t simply jump on the market and start doing your thing.
This monopoly from third parties has two essential consequences:
Banks and brokerages live through the commissions and rates you’re paying them. Basically, you’re paying them so that they let you administer your funds. That’s arguably very similar to protection money if you want a more vivid comparison.
Your money is never your own. As soon as you open a savings account, the bank lends your money to someone else.
Besides, the status quo disadvantages low-income individuals. More affluent people have higher credit scores, and therefore, they have better options in terms of loans and investments.
At the same time, DeFi can appeal to dishonest companies that have a lot of power and want to make more illegal transactions. Currently, banks and governments can block such a company’s access on the market or even its funds – for example, until after that company can explain its books.
But a decentralized market with no third-party regulations would be heaven for such companies/ people as well.
How Can You Use DeFi?
So, as we’ve said before, you can only use crypto to trade on the DeFi market. The two most important currencies that people are using today for online trading are Bitcoin and Ethereum.
Also, these DeFi apps are called dApps – where the small “d” stands for decentralized.
These dApps are incredibly versatile, so that you can do almost anything with them. However, their best use is financial transactions.
Thus, if you want to transact/invest your funds without any central authority, bank, or brokerage meddling in your business, dApps will help you:
Make transactions, including payments, lending, and borrowing money, trading, or even getting insurance. Yes, each of those conventional activities now has a DeFi version. For example, peer-to-peer loans are the alternative to bank loans. Also, DeFi insurers are the alternative to insurance agencies or banks.
Make trades, such as buy or sell from other people directly. You’ll use decentralized exchanges called DEXs for the job, the most popular of which include Uniswap and SushiSwap. Sure, you can also use traditional exchanges to trade your crypto, but where’s the fun in that?
Use e-wallets to keep your cryptocurrency and your private keys. Tools like Trezor and Exodus will help keep your funds secure from computer viruses or potential hackers
DeFi Disadvantages You Should Take Note Of
The main advantage – and appeal – with DeFi is that regular people don’t have to deal with “the system” that imposes seemingly arbitrary regulations. But, just like how there are misconceptions about personal loans, there are pros and cons of DeFi as well. DeFi:
Offers less protection. A lot of those rules established by “the system” protect people. For instance, the maximum loan limit that MAS imposes protects you from getting into bad debt. Also, you get insurance for your bank deposits to up to $75,000.
Is more unpredictable. Cryptocurrencies are more volatile than fiat currencies. Remember how Elon Musk helped crash Bitcoin with just one declaration? Well, panic selling can instantly lead to that rapid devaluation, whereas you’d never see something like that with fiat currencies.
Isn’t 100% secure. Online theft, fraud, scams, and hackers, are an intrinsic part of online transactions. In fact, in just the beginning four months of 2021, crypto thieves stole 432,000,000 USD combined. And 56% of that sum was in some way or other connected to DeFi.
So what can you do to stay safe in the DeFi world?
The keyword is research. Just like with any other investment, don’t put your money into an app you haven’t checked. From that point of view, obscure DeFi apps are riskier than reputable ones.
So, when you’re evaluating dApps:
Check if the codes are shared publicly
Read user reviews about that platform
DeFi Conclusion – Is It Right For You?
The decentralized finance system offers appealing opportunities, but it’s also higher risk than the traditional finance system for regular people who don’t have piles of money lying around their houses.
Never trade more than what you can afford to lose.
Stick to the best-rated platforms instead of obscure dApps.
Clear all of your debts before investing. Personal loans are able to help you clear credit card debts easily.
Although MAS is keeping an eye on the crypto sector, it only issues warnings so far. But, if more Singaporeans get into crypto – and start losing their money – it wouldn’t be a surprise to see MAS also restricting trades or imposing some regulations.
Basically, the decentralized finance system was born from an acute universal need of people to step away from the limitations imposed by the current system. However, it’s not likely that the governments and banks will loosen their grip anytime soon.
But is that really such a bad thing?
After all, you can still invest your money wisely using DeFi. Just remember not to do anything too risky. And, if you need additional financial help, Credit Master is always here for you. With fast loan approvals and customizable packages, let us lend you a hand.
At CreditMaster, we believe in building long-term relationships with our clients. Our team of experienced professionals is always ready to provide personalised financial advice and assistance to ensure that our clients make informed decisions. We understand that each client's situation is unique, and we strive to tailor our services to meet their specific needs.
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