by Jacek Korneluk

The original work was titled “Decentralized Finance – DeFi, Evolution or Revolution in Digital Cryptofinance and Blockchain Economy”. It was published in 2021 as a university assignment.

This is a new writing based on the original and slightly updated.

“Not every project is a brilliant idea, as not every carbon turn into a diamond.”           JK Student

My dear followers and readers. Have you heard about DeFi yet? I am pretty sure that the majority did, but for many, it is an unknown term, until now!  It’s still the fresh “buzz” in the world of finance, and it’s transforming the way we think about money and finance. Let’s dive in a bit together and explore this awesome and revolutionary concept!

When I first came across DeFi 1(Sharma, R. 2023), I was mesmerized by its magic and mystery. The excitement, curiosity, and strong intention to learn more kept me hooked. The world of DeFi (Decentralised Finance) evolves at such a rapid pace that it feels like something new is always on the horizon. The more I learn, the more I realize there is still so much to discover. The discovery continues till now, but more theoretically and in a bit slower motion than before. But I am continuously reading Defi electronic Magazines like The Defiant 2(Defi News). I am also trying to stay up-to-date with community groups on a daily basis.

Decentralization is a beautiful term, especially when combined with finance.

It’s shaking up the world economy, and it’s happening through evolution or even revolution. The background and timing of events trigger these transformative changes. Some media even refer to it as the part of fourth industrial revolution, and I can’t help but think they’re onto something.

Don’t get me wrong, I’m also a fan of CeFi – the Centralised Finance n(Sharma, R. 2023), but there’s something about DeFi that feels different. It’s fresh, innovative, and far from the boringly obvious. It’s like a breath of fresh air in a world dominated by intermediaries and centralized control.

Let me give you a short introduction to DeFi.

It all started with a few young individuals who presented their open-minded ideas and open-source coding at a hackathon conference. And “Voila! The idea exploded, capturing the attention of decentralized coders, independent bankers, and innovators who sought independence and robustness.

This gave birth to the DeFi movement, an open community for decentralized finance platforms. Essentially, DeFi is a form of finance that operates on the blockchain, free from the influence and control of central financial authorities. No banks, no central exchanges, no brokerages. Instead, DeFi replaces middlemen with Automated Market Makers (AMM) protocols and Smart Contracts (SC).

DeFi offers a wide range of financial services, along with unique opportunities. You can trade on decentralized exchanges (Dexes) called Swaps 3(George, B. 2022), and engage in lending, borrowing, and staking. Staking can be done with single assets (SAS) or even multiple assets, generating passive income. You can manually harvest rewards through farming or enjoy auto-compounded rewards in Vaults. Participating in Liquidity Pools is another option, allowing you to earn rewards from Dex activities, although it’s important to consider the concept of impermanent loss. Additionally, there are Launchpads and Initial Dex Offerings (IDOs) that present opportunities for venture capitalists and early investors.

Despite promising future forecasts for DeFi.

Remember, before you dive headfirst into DeFi, do your own research (DYOR). Minimizing investment risks and maximizing profits requires checking whitepapers, participating in community groups on Telegram 4(Telegram) and Discord 5(Discord), and following trusted sources on Twitter. The risk is always there, as DeFi keeps evolving. Some see this as a “horror,” while others embrace it as the “new normal.” It’s ultimately your personal choice to participate and make judgments.

The potential for profit in DeFi is undeniable, but it also comes with risks. Double or triple-digit Annual Percentage Rates (APR) are common in DeFi. The higher the APY (Annual Percentage Yield), the greater the potential problems, especially with long-term investments. If a project is good, news spreads quickly, attracting more participants. This dilutes rewards and lowers APR and APY, but it can still be much better than the interest rates offered by centralized banks. That’s the beauty of revolutionary ideas built on a decentralized banking system.

It’s worth mentioning that DeFi doesn’t promise “zero-risk” projects.

While striving for low-cost transactions is common, expecting multiple-digit interest with minimal or no risk involved is not. Investing in DeFi requires caution.

Additionally, there are innovative inventions like DeFi Aggregators and Accelerators, such as Yield Optimizers, that automate processes and minimize costs, which may lead to greater profits. But, as with any experimentation, these projects often have a limited number of participants who carefully consider the potential consequences.

Exploits and project failures can be dramatic and painful for the DeFi community. However, they also serve as valuable lessons. Investigations and postmortems following such events reveal weaknesses and bugs in the code, contributing to the development of projects. Before investing, it’s always a good idea to check RugDoc code auditing statements and the duration of potential time locks.

If you’re new to DeFi

New, or prefer a partly safe approach, consider single asset staking (SAS) using stablecoins. It can be a more digestible and newbie-friendly strategy. For experienced investors, it can be a “hodling” strategy while hunting for another DeFi gem.

Also, remember don’t let FOMO (Fear of Missing Out) rule your mind. Take a calculated and informed approach. Be familiar with a Fear & Greed Index as well.

Finally, learning some technical analysis elements and techniques may clear your mind and help with general understanding.

DeFi has come a long way since its origins with MakerDAO  6(MakerDAO).

From the first investment in DAI to the astounding $241 billion locked in 2021 to 44,302 billion locks currently July 2023 DefiLlama  7(DefiLlama).

It is “locked” on 196 blockchains (Chains) in Total Value Locked (TVL)

It’s an impressive achievement in the short history of decentralized finance despite all the troubles, pumping and dumping, shakings and exploits associated with it. We have to stay realistic, learn, practice, and have some Hopium.

The Hopium 8(Hamilton, P. 2020) and an adequate level of education may be the key to real profits and beneficial change.

DeFi embodies independent thinking, open-sourcing, and coding style.

It operates on various blockchains like Ethereum, Polygon, Solana, Fantom, and many more. It pioneers sidechains and bridges that enable interoperability, providing a truly free financial experience on the blockchain. On-chain governance voting systems empower token owners to shape the future of the DeFi projects they participate in.

The future of DeFi looks promising. It has the potential to revolutionize not only finance but also industries. DeFi opens doors to new business models, payment platforms, and solutions, challenges traditional systems, and champions the power of individuals. It’s a decentralized revolution that keeps getting evolutionary stronger.

In some of my previous writing I mentioned a Decentralised Autonomous Organisation (DAO). DAO 9(Rennie, E.  Potts, J. 2016) may be super handy when it comes to governing and voting on innovative financial projects.

So, do not hesitate, to read, and learn more. Carpe diem!

Dive deep into the world of DeFi, at least in theory to witness the incredible possibilities it holds. It may be the adventure of a lifetime, and we’re here to explore it together. Let’s unlock the full potential of decentralized finance and embrace the decentralized Web3!

Size the day! The future of finance is partly in our hands.

References:

1. Sharma, R. (2023) What is Decentralized Finance (DEFI) and how does it work? Investopedia. Available at: https://www.investopedia.com/decentralized-finance-defi-5113835

2. Defi News: Your trusted guide to defi, ethereum & web 3.0 (no date) The Defiant. Available at: https://thedefiant.io/

3. George, B. (2022) What is a dex? how decentralized crypto exchanges work, CoinDesk Latest Headlines RSS. Available at: https://www.coindesk.com/learn/what-is-a-dex-how-decentralized-crypto-exchanges-work/

4. A new era of messaging Telegram. Available at: https://telegram.org/

5. Your place to talk and hang out Discord

Originally published at https://spektrumlab.io on July 14, 2023.