Decentralized finance has a bad rap in many circles, mostly because crypto is more known for its speculation, its degen behaviour and leverage. Behind that though lies opportunity. I’m not talking about buying the next dog coin hoping that it will up go up by 10,000%. Rather, I mean using core holdings (such as BTC, ETH, SOL or stablecoins) to invest in a highly efficient environment and being able to generate returns that on an adjusted risk basis are far superior.
Talking about risk-adjusted is important because it’s clear that there is more risk involved in putting funds in a platform that is not FDIC insured, that is susceptible to be hacked, using a highly volatile asset. As more assets become tokenized, more opportunities will be available and while many will choose to go for max leverage, for more disciplined investors, many opportunities will be possible.
Why Is DeFi More Efficient?
–Proof of ownership: banks and other financial institutions figuring out who owns assets which for real estate is easy to imagine. But sending my brokerage statements when those assets are located within the same bank? Surely there is a better way? Crypto makes it easy to see who owns what and even to provide such assets as collateral.
–The overall efficiency of lending, borrowing and liquidations can be much better on-chain. Parameters can be set (such as what % can be borrow against specific assets, what are the liquidation points, etc). Once markets start moving, all borrowing, lending setting of rates as well as even liquidations can be automated. Aave, a decentralized lending platform has over $11bn in assets as of writing with 11 employees.
–Ease of use: Those pesty forms that need to be filled for all involved? Not necessary in DeFi.
–Competitive nature: Look at the rates offered in your traditional bank account. Probably close to 0%. In DeFi, with everything just one click away, offering something like this would simply mean users moving away.
–Airdrops: One common phenomenon that is true in crypto is that many users end up launching their own token at some point and reward their early users and contributors by giving them an allocation of those tokens which can be worth hundreds, thousands or even tens of thousands.
Seeing all the reasons why DeFi is more efficient than TradFI explains why so many opportunities are available in crypto and are one more reason to look at crypto when thinking about investment opportunities.