Image: RiveX
Think about everything you know about finance and banking systems. Then imagine that all your business is conducted online, without needing to interact with people or employees in any way.
Imagine banks without bankers, or even a fully automated banking system. Imagine all the financial services we're used to operating without the elements we're accustomed to. You can imagine, but these systems are being built while you sit idly by. You can only imagine, and then you can say you don't trust them.
Just kidding, we didn't mean it like that. Would we ever make our readers feel inadequate? Absolutely not. But our dreams weren't in vain either; what we dreamed of was actually one of the most interesting fields of our time, known as DeFi , or " Decentralized Finance " !
This system allows you to profit in the crypto world using methods that most people aren't familiar with. To be more precise, you can earn a profit by investing your savings in interest-bearing accounts, essentially lending them to a bank, just like in traditional financial systems. First, you need to invest a certain amount in the cryptocurrency in question to own the unit within the system; otherwise, you can't trade. Then, you can lend a portion of your investment to the system or to others, thus facilitating its circulation. By maintaining your investment in that currency, you demonstrate your trust, thereby increasing liquidity within the system, which remains constant until you withdraw your money. In return for this contribution, you earn a certain amount of "interest," just like in traditional financial systems.
So how is this interest rate determined? Just like with the interest we can earn with fiat money, it depends on several factors. However, in our fiat money world, there is no central bank influencing interest rates. While central banks can play a role as external factors in the cryptocurrency world, they don't actually have a direct influence. The way central banks influence interest rates is through the extent and cost at which they allow banks to borrow and lend; since there is no such authority in the crypto world, things can proceed more freely.
By providing liquidity to the system's currency, you also facilitate other transactions within the pool. You entrust your money there with confidence, and in return, you are rewarded, either through a portion of the transaction fees or through various formulas created by the system—that's exactly what we mean by interest!
However, caution is still advised, and this should be a phrase we never tire of repeating. Investment in Decentralized Finance projects was around $250 billion in December 2021, but this amount dropped to around $62 billion in mid-August. While this is indicative of the general decline in the cryptocurrency market, it should also remind us that we should not act on investment without thoroughly examining the project we are interested in.
According to a list shared by CoinShares, there are some risks we should be aware of before investing in the DeFi world.
The first of these is that troublesome friend of ours known as Volatility. Volatility is something that has affected the entire crypto world, so it's something we should always keep in mind.
The second risk is the potential for Ponzi schemes. Just as we can see many examples of Ponzi schemes in our world, it's not difficult to foresee that there will be examples of them in a new financial system. However, it's important to remember that this isn't a drawback of the system itself; humankind can manipulate and misuse any system to suit its own rules. To avoid being scammed by investing in such seemingly unrealistic ventures, all we need to do is keep our ears and eyes wide open. As long as we don't invest without knowing and researching, we don't have much to fear!
We'll continue discussing this system next week, and if there are any other topics you'd like us to cover, please let us know!
Happy Sunday everyone, and we wish you all a wonderful start to the coming week!
Also, a quick note: You can share our Decentralized Bulletin profile page with your loved ones and those interested in these topics using the link bit.ly/merkezsizbulten. You can also access all our social media accounts from here .
Originally published on Medium on August 28, 2022. English translation of “Merkezsiz Bülten: DeFi Dosyası 1”.