Earn 10x more interest on your savings with DeFi
These days, if you mention that ‘decentralized finance (DeFi) is revolutionary’ you may get more than a couple of eye-rolls.
Yes, decentralized finance — the ‘catch-all’ term for financial apps built on a decentralized ledger (blockchain) — is impactful, but what can you actually do with DeFi, day-to-day?
Better yet, what advantages does it offer compared to traditional financial (TradFi)?*
Much more than a buzzword, DeFi offers the following real-world benefits.
One of DeFi’s key value propositions is that it’s self-custodial: Sometimes referred to as non-custodial, self-custodial means that you, not a financial institution, hold your own money.
Technically speaking, this means that you have unilateral control over your private keys — cryptography that allows you to access your funds, which exist on a blockchain like Bitcoin (BTC) or Ethereum (ETH).
By contrast, in traditional finance, the bank becomes the custodian of your funds. Though the bank is liable for the funds in your account, it can lend out 10 times more money than it has in reserve.
DeFi typically offers higher rates of return than traditional financial products because it:
Removes the middleman: DeFi allows parties to transact directly with each other by removing the financial institution necessary in traditional financial transactions.
Reduces overhead: DeFi replaces a financial institution’s bureaucracy with software, aka smart contracts: blockchain-based code that self-executes when its criteria are met. By increasing capital efficiency, DeFi increases returns.
Introduces new financial opportunities: Not only does DeFi simplify and automate existing financial mechanisms, but it also introduces new opportunities, e.g. a crowdfunded currency exchange or securing transactions on a blockchain (staking), both of which earn rewards.
Unlike traditional finance and centralized finance (CeFi) products, DeFi transactions and yield mechanisms are completely transparent.
As DeFi apps are open source and built on public blockchains, you can actually track what your money is doing on-chain and how your returns are generated.
Compare this to CeFi (e.g. cryptocurrency interest platforms) and TradFi, neither of which provide insight into how funds are lent out and protected behind the scenes.
CeFi and TradFi products require your absolute trust; DeFi is trustless.
Not only can DeFi offer higher returns than CeFi and TradFi, but its yields can also be non-speculative.
Investing in cryptocurrency or stocks is speculative by nature: People invest when they believe that an asset’s value will increase, at which point they will be able to sell at a profit.
Though speculation does exist in DeFi (e.g. cryptocurrency and NFTs), decentralized finance can also offer monotonically (constantly) increasing returns.
For example,DeFi’s equivalent of a savings account, which generates interest through DeFi lending environments, offers consistent yields from borrowers at a rate several times higher than traditional saving accounts.
As a decentralized ledger of transactions stored on computers all around the world that confirm (or reject) transactions, blockchain makes it next to impossible to alter a record after the fact.
By contrast, CeFi stores user data in centralized databases that are only as safe as their security, the exact nature of which is almost always unknown to users. In other words, centralization = a central point of failure.
By contrast, most DeFi products are built on Ethereum, the world’s leading development blockchain that secures tens of billions in US dollars.
DeFi can involve creating accounts on multiple platforms, doing several expensive currency conversions, and figuring out which DeFi protocols you want to use.
If you want to get started the easy way, you can use something like Gelt High-Yield Savings.
With non-custodial and transparent interest generation processes, Gelt keeps true to the DeFi values mentioned above while offering user-friendly access to high-yields, plus fund cover.
Traditional finance (TradFi): The established financial sector, including financial institutions (banks, credit card companies, credit unions…) and conventional financial products (loans, savings accounts, credit cards).
Centralized finance (CeFi): Non-transparent applications that allow users to interact with cryptocurrency and DeFi (e.g. a cryptocurrency exchange, cryptocurrency interest platforms).
CeFi applications are typically custodial, meaning that they hold users’ cryptocurrency keys, and through them, users’ cryptocurrency. Related reading: “DeFi vs. CeFi: A Detailed Comparison”
Disclaimer**: Any financial or saving strategy involves putting your funds at risk. This article is intended for informational purposes only and does not constitute investment advice. For financial advice, speak with a licensed professional.**