There’s no question that DeFi took center stage in 2020. The prices of DeFi tokens went up by multiples. Articles on crypto news sites show that people locked up millions of dollars worth of their cryptocurrency holdings on smart contracts through DeFi sites — all hoping to earn interest on their holdings.
But can this continue?
Let’s dive in.
Crypto Lending — Why People are Using it.
Taking it from the start, DeFi stands for Decentralized Finance.
A recent Forbes article quotes Alex Pack, managing partner at Dragonfly Capital, a $100 million crypto fund, to help us link the importance of DeFi with cryptocurrencies:
“The goal of DeFi is to reconstruct the banking system for the whole world in this open, permissionless way,” says Alex Pack. “You only get that shot every 50 years.”
Perhaps this is why Grayscale, the world’s largest crypto investment fund, has kept growing over the years and is now currently managing over US$5.2 billion of crypto assets, out of which, $4.4 billion of it is bitcoin itself (the king of crypto for this very reason).
The way DeFi is able to integrate with cryptocurrencies (which are here to stay) shows that DeFi could be here to stay too.
People use DeFi both to make money and to save money.
People who use DeFi to make money are the lenders. Lenders post their bags of cryptocurrencies to the smart contract run on a DeFi platform.
The smart contract on the DeFi platform then pays out interest according to the DeFi platforms specifications.
You can earn money too.
Just find a DeFi platform from the list of the best ones located on the link at the top of the article.
Then, find a coin you own and would like to earn interest payments from. Deposit the amount of your coins you feel safe in storing on the DeFi platform. After that you’re all set. Collect interest payments and withdraw them plus your coins when you see fit.
You can save money with DeFi as well.
If you’re looking to borrow funds to pay down certain expenses, you can use a DeFi platform to do so.
Since the platform is decentralized, you don’t need to go through a loan agent or any traditional process like that. Instead, the process will look something like this:
- Deposit collateral coins
- Recieve your loan funds in the currency available and of your choice
- Pay your loan according to the contract
- After final payoff, get your collateral returned to the address you specify
It’s as simple as that.
Crypto Lending Safety
Nevertheless, even though the hype around DeFi may be justified, and even though it may be here to stay — there are certain risks which would cloud the future of DeFi in 2021.
DeFi is still a new technology and new financial product. There are bugs in the system.
There have been several instances where a DeFi platform was hacked for their funds. After all, even if the DeFi smart contract is secure, other issues may exist.
For example, what if the DeFi developers don’t secure the funds of their customers properly? What if their hot wallets get hacked? What if their cold wallets are stolen or otherwise compromised somehow?
DeFi financial services are not regulated. The only security standards and fair practice standards they need to adhere to are the ones they choose to stick to.
If the platform choses to hold themselves to a high standard of security and fair practice, then their customers will be safe. If not — then not.
Therefore, since it’s up to the platform’s themselves to regulate their own security — the future of the entire industry is less certain.
All it takes is enough platforms to lose their funds to hacks or exit scams, and the reputation of the entire industry will suffer.
2021 will be a year where DeFi must grow and regulate itself enough to keep a strong reputation of safety for their customers — otherwise the year will be a tough one to endure.