DeFi is short for “decentralized finance,” an umbrella term for blockchain applications geared toward disrupting financial intermediaries.
DeFi draws inspiration from blockchain, the technology behind cryptocurrencies, which allows several entities to hold identical copies of a history of transactions, meaning it isn’t controlled by a single, central source. That’s important because centralized systems and human gatekeepers limit the speed and sophistication of transactions while offering users less direct control over their money. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases.
Most DeFi applications are built on top of Ethereum, the world’s second-largest cryptocurrency platform, which sets itself apart from the Bitcoin platform in that it’s easier to use for other types of decentralized applications beyond simple transactions.
How do I make money with DeFi?
The value locked up in Ethereum DeFi projects has been exploding, with many users reportedly making a lot of money. Using Ethereum-based lending apps, users can generate passive income with a process called “yield farming,” or loaning out their crypto and generating interest from the loans. Yield farming has the potential for larger returns, but also with larger risk. It allows users to leverage the lending aspect of DeFi to put their crypto assets to work generating the best possible returns. However, one should exercise caution as many yield farming projects tend to be complex and often lack transparency.
Is investing in DeFi safe?
DeFi is quite risky especially for newcomers because it's difficult to separate the good projects from the bad. However, many believe it is the future of finance and that investing in disruptive projects early will lead to massive gains.
When will DeFi go mainstream?
While more and more people are being drawn to these DeFi applications, it's hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood, drawing in hordes of new users by making financial services more inclusive and open to those who don't traditionally have access to such services.