Despite this, not everyone understands how they operate, and the decentralized finance (DeFi) sector can imply intimidation. Many people have lost out on the significant returns available in DeFi as they believe it is only about trading Bitcoin, Ether, stablecoins, and other cryptocurrencies.
Ive worked with many people who believe this way as AQRU''s CEO. This is why I have dedicated significant efforts to increase awareness about DeFi and explaining that decentralized finance is similar to the traditional financial system in terms of lending, savings, and insurance. However, these services, unlike its traditional counterpart, utilize peer-to-peer and blockchain technology to eliminate intermediaries and to provide higher returns for investors.
Let''s look at the decentralized finance structure, how the system works, and how it has managed to provide higher returns than traditional finance.
How does decentralized finance work?
Decentralized financing is built on blockchain technology, an immutable system that organizes data into blocks that are grouped together and stored in hundreds of thousands of nodes or computers.
These nodes communicate with one another (peer-to-peer) and then provide information to ensure that they are all up-to-date and validating transactions, usually through proof-of-work or proof-of-stake. The first term is used when a member of the network is required to solve an arbitrary mathematical puzzle to add a block to the blockchain, while proof-of-stake is when users set aside some cryptocurrency as collateral, giving them the opportunity to be chosen at random as a validator.
People who are chosen to be validators are given cryptocurrencies as a reward for verifying transactions. This technique is mainly known as mining, which has also enabled DeFi to open additional opportunities. In traditional finance, are only offered to large groups, for which members of the network to make a profit. DeFi has also been able to reduce the costs that intermediaries charge so that management expenses do not affect a large portion of investors returns.
All transactions are executed in decentralized finance, which is controlled by smart contracts that are, in part, programs or pieces of code, stored on the blockchain and are only enacted when certain requirements are met.
If the agreement is broken or the seller blocks the transfer of the NFT, a smart contract would determine that there has been a breach of contract and it would not complete the transaction.
Decentralized finance has no need for a central or independent third-party to review that the contracts are fulfilled, and, if there was a breach, to determine where the issue arose, and how the non-compliant party should compensate the victim.
Traditional finance is encased in decentralized finance.
DeFi may seem to remove intermediaries but it is possible to save users a few pence in transaction fees. However, the reality is much more impressive especially when it comes to traditional finance, which is why it is time to look at how a bank and the stock market work, and why the way the DeFi system is developed to give the upper hand to users.
The bank invests the assets in its diversified holdings to generate profit which can range between 10 and 20%. However, operating a bank is costly. Customers with inflation having just reached a 30-year high in the United Kingdom, are expected to receive returns of up to 0.06% per year. Economizing money in the bank is a fantastic method of becoming more poor in real terms.
Stocks and shares are not much better. Professional traders make investments with average income of around 10% per year, but the reality is that normal people return much lower, with the Securities and Exchange Commission reporting that 70% of day traders lose money every quarter. Similarly, risk-averse investors who are focusing on these so-called safe investment options may not lose money, but their returns will likely to be lower if they are lucky, instead only outstrip inflation.
This is where the peer-to-peer nature of the blockchain comes into its own. In collateralized lending, smart contracts often require lenders to deposit 150% of the value of the loan and automatically enforce the terms of the agreement, reducing the likelihood of nonpayment. And, as the whole process is organized by computer code, there are no additional or hidden charges, which means that most, if not all, the returns go to the lender.
Liquid mining, a method used by decentralization, gives investors greater returns as a result of the investment risk, as newer and riskier coins pay excellent returns per year. While traditional tokens, such as Bitcoin, stablecoins, and Ether, are likely to yield significantly higher returns than other currencies. DeFi does not require gas to cover blockchain transaction costs.
Theres more than higher returns
Through smart contracts and blockchain technology, investors have access to additional security and transparency that is not currently available in traditional finance.
Given that smart contracts have been successful and improved for years, they are now capable to ensure that both parties deliver exactly what they have promised. And, if the terms of the contract need to be changed or loopholes must be filled, the unidirectional nature of blockchain prevents changes from being made to the contracts without the assistance of both parties. This is significantly different from those letters we often receive from banks stating their new terms and conditions that we may either accept or refuse, as long as we are willing to switch to another provider.
It''s more than ensuring that contracts are followed and that no changes are made without our approval. As a result, many platforms, such as our own AQRU app, that allow users to access the decentralized markets are learning from traditional finance and implementing many of the security technologies that banks employ. This has provided reassurance to users that through DeFi they can receive higher returns while also managing risk effectively.
Decentralized finance is a new financial ecosystem, which, grace to tight security controls, may assist everyday investors in generating high returns and increasing returns. Blockchains have also allowed a variety of options to be used to create impressive financial products, posing a serious challenge to traditional financial institutions.
DeFi is a way to maintain and produce value without too much risk or time constraints. We believe that investors should begin seriously considering the decentralized markets as part of a diversified investment portfolio, and the returns may be just too good to miss.
Philip Blows is the CEO of AQRU plc.