Why will Defi explode again in 2022?

In 2022, we are likely to witness another surge of innovation in the Defi space.

The idea of ​​Defi is to provide banking and other financial services without institutions. No bank or organization can be trusted to hold, trade and protect your assets for you. You own and control your own digital assets. Everything is automated and managed by code. Since it is built on the blockchain, its security is guaranteed through cryptography. And Defi, like its name, is a decentralized, indestructible, and transparent system that is open to anyone.

While traditional banking remains deeply dependent on centralized institutions, decentralized finance is creating the conditions for the next financial revolution. The rise of these applications enables people to interact directly with banks and financial institutions, eliminating the need for intermediaries. In the future, people can use these apps to transfer money, borrow money, invest, and insure assets. Additionally, the rapid growth of the industry will create jobs for millions of people.

DeFi eventually has the potential to democratize financial services. The so-called democratization of finance can be better understood through some examples. For example, by redefining financial services as decentralized software applications (Dapps), individual users will have the possibility of not dealing with any centralized entity. borrow cryptocurrencies. With DeFi, people can borrow cryptocurrencies (or you can just think of it as money) from liquidity pools. Liquidity is provided by investors (you and me), depositing the desired cryptocurrencies into the pool while maintaining ownership of their assets. If someone borrows money from the pool, investors take a portion of the transaction fee. In addition to this, when cryptocurrencies appreciate, investors can

withdraw their assets from the liquidity pool after a period of time, plus the interest it earns from providing liquidity. Liquidity pools typically offer high annual percentage yields or APY. It is common to get 100% or 1000% APY (Annual Yield) from liquidity pools. This is mainly due to getting rid of intermediaries (banks), as generally speaking, banks get the most from fees and interest.

Whereas traditional financial ecosystems are based on centralized infrastructure, decentralized finance is powered by code running on the Ethereum blockchain. Unlike fiat currencies, blockchains are immutable and anyone with a computer and internet connection can execute smart contracts. At the same time, since decentralized currency financial development is open source, it is a more cost-effective way to build enterprise-grade solutions. You can even build entire companies on these new technologies, such as blockchain-based e-commerce platforms.

DeFi protocols are based on permissionless blockchains. These are basically open source and censorship resistant. Furthermore, the DeFi system is not controlled by any centralized authority. This will allow more people to participate in decision-making and users can benefit from its development. With its open-source design, DeFi will enable peer-to-peer lending and create new corporate governance models (like DAOs).

The decentralized finance industry will provide new financial services that were not available in the past, and the industry will also benefit from a more competitive environment. For example, exchanging money with blockchain will be more convenient than relying on traditional banks. In addition, the network will be more secure and the system more efficient. This will also enable more transactions per second, which will increase the overall value of the network.

Since DeFi does not require a centralized authority, smart contracts automate the Defi system, simply triggering the execution of specific transactions once the parties involved meet specific criteria or comply with their agreed commitments. Smart contracts utilize Oracles (oracles such as Chainlink) to link with real-world data.

Nevertheless, we still cannot ignore the existence of risks. DeFi does promise high rewards, but it also comes with high risks. This is mainly caused by the volatility of cryptocurrencies, of which impermanent loss is one of the consequences. At this stage it also cannot guarantee that the underlying code that powers the smart contract is free of bugs. DeFi platforms can also be prone to bad actors. DeFi technology is still in its infancy, learning from mistakes and has a lot of potential to grow. It’s getting better and more secure as it evolves.

While some may be hesitant to enter the world of decentralized finance due to the barriers and risks that exist in the crypto space, those who are already involved are enjoying a steady return on their investment. It is only a matter of time before more people will realize the value and superiority of DeFi and eventually jump into it. As more and more people enter, DeFI will be pushed into the mainstream and may eventually upend the centralized financial system.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-will-defi-explode-again-in-2022/
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