DeFi, Decentralised Finance refers to an ecosystem of financial applications built on top of the Ethereum blockchain. Developed on a transparent and trustless blockchain network, it aims to operate in a decentralized way without the dependency on middlemen in financial transactions.
DeFi uses open-source technologies, blockchain, and protocols to achieve the goal of decentralization. Smart contracts encode the terms and activities necessary for agreement between buyers and sellers or lenders and borrowers. These services are conducted through specific codes rather than by a bank or other institution manually.
Regardless of the technology or platform used, the main goal of DeFi systems is to remove intermediaries between transacting parties.
DeFi is an excellent innovation with limitless possibilities and a wide range of financial services.
DeFi or Decentralized Finance stocks are a great form of investment if you research well which DeFi stocks to buy. Let’s dive into the details!
Why Should You Invest in DeFi Stocks
There are different reasons to invest in DeFi stocks. Let’s see why investing in them is a great idea:
Access to Loans
Not everyone has a bank account or qualifies for a loan from a traditional financial institution. Procuring loans from banks can be very difficult and is not an altogether great idea.
In contrast, DeFi stocks provide accessibility to loans regardless of location. All you need is internet connectivity.
Reduced Interest Rates and Fees
DeFi platforms offer an excellent alternative to traditional finance’s high transaction fees and interest rates. They allow direct transactions between two parties without intermediaries, thereby helping to reduce transaction fees and offering favorable interest rates to borrowers and lenders.
Efficient Security and Transparency
DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. The smart contracts are available on the blockchain, providing an immutable, transparent financial ledger as a reference whenever needed.
Functional and Decentralized Autonomy
The most significant advantage of DeFi over traditional finance is its non-reliance on regularized money institutions like Central Banks.
Time has shown that modern stock markets can crash, as epitomized by the stock market crash of 2008. Their fallibility can be linked to the interdependency on volatile national governments with even more volatile financial and economic policies.
Unfavorable government policies, corruption, and potential bankruptcy are other disadvantages of investing with centralized financial institutions.
DeFi offers an alternative to centralized finance. Investing in Defi stocks automatically mitigates most of the risks associated with traditional financial investing.
How to Invest in DeFi Stocks
Let’s discuss several ways of investing in DeFi stocks below.
Buy a DeFi Token
The most straightforward way to invest is to buy a DeFi coin such as Ether or any other.
Purchasing a DeFi token gives you access to almost all the DeFi industry.
Deposit in Liquidity Pools
After purchasing a relevant token, you can deposit it into lending reserves called liquidity pools to earn passive income.
Market liquidity refers to the trading rate, i.e., buying and selling tokens within the market. The higher the market liquidity, the better the chances of making a trade and profit.
Depositing a relevant trading pair means contributing to a liquidity pool. The higher your deposits and the longer you leave them in reserve, the more profit on the interest you make.
The high demand for deposited tokens within DeFi networks is among the reasons for the popularity of yield farming.
Participants deposit tokens on high-paying DeFi platforms or networks with excellent interest rates. After that, they keep a close watch on the fluctuating incentives and interest rates on their platforms and other platforms.
Once yield farmers notice that a different platform offers more favorable rates, they go on to maximize their earnings by transferring their crypto deposits to the relevant DeFi network. This is done per interest fluctuations network-wide.
Deciding Protocols on Governance Tokens
Another great way to invest in DeFi is to decide on the future of the governing protocols. Many DeFi platforms offer the globally distributed and decentralized community of stakeholders governance tokens, thereby giving them agency, responsibility, and control of platform management.
Let’s view buying UNI (Uniswap) as an example. Uniswap is a governance token, meaning that when you hold it in reserve, you can vote on the token’s protocols. Your decision-making ability is proportional to your Uniswap holdings. As the platform gains in popularity and value, more Uniswap holdings will be required to make proactive decisions on its future.
Popular DeFi Stocks to Invest In
There are several DeFi stocks you can invest in, depending on your preference. Here are a few of the most popular ones:
Aave is the most popular DeFi token and is considered the bank of the cryptocurrency industry. As one of the most prominent DeFi blockchains, Aave has more crypto reserves than any other platform.
Aave allows its users to deposit crypto tokens to earn passive interest. In addition, users can lend their tokens to access collateralized loans. This further helps users to leverage their crypto holdings and positions.
Uniswap is one of the most popular decentralized exchanges on the Ethereum blockchain.
Uniswap’s smart contract protocol facilitates the financial interaction with Ethereum wallets, creating a secure, permissionless, and trustless way to trade crypto.
DeFi Pulse Index
DeFi Pulse Index is a tokenized asset, a crypto exchange-traded fund that allows you to handpick your DeFi stock investments. You can buy it on Uniswap.
Curve is an AMM (Automated Market Maker) that allows you to transact stablecoins like USDC and DAI with reduced fees and slippage. Several other DeFi networks run on Curve.
YFI provides decentralized lending services, yield farming, and decentralized insurance. It deploys users’ crypto reserves in other decentralized finance protocols like Compound, dydx, and Aave to provide the most favorable market interest rates.
YFI has come into existence since DeFi’s early days and has become one of the most valuable tokens on the cryptocurrency market today. Yearn.finance (YFI) has a market cap of $1.2 billion, and its value is $34,498.53.
How to Use DeFi
The best way to learn using DeFi is to interact with DeFi platforms.
DApps (decentralized applications) are easy to use. You don’t even have to create an account to use them- your Ethereum wallet will suffice. MetaMask is a good choice for an eWallet, as it has a browser extension on Chrome that you can use.
After transferring your tokens to your wallet, you can access DeFi platforms with only a handful clicks. You will only have to synchronize your Ethereum wallet to the selected platform and start enjoying the benefits of DeFi.
Trading is easy on platforms like CoinStats. You can link your Metamask, Binance, and Coinbase accounts to your CoinStats accounts for seamless trading.
You can also learn more about trading platforms, crypto exchanges, DeFi tokens, etc., from our CoinStats blog.
However, despite its growing popularity, DeFi tech is not failsafe, and you can lose all your money if you invest in a DeFi platform that’s not secure enough. As they rely on smart contracts, DeFi startups can also fail due to programming errors.
Nevertheless, new DeFi programs address the deficiencies resulting from a lack of adequate insurance and offer Decentralized Insurance as a new way of protecting against loss of funds from faulty smart contracts.