DEFI: The niche market of Decentralized finance

The opportunities are great – but so are the risks

The market for DeFi – Decentralized Finance – is so far only for freaks, a niche product in the big new world of crypto currencies. But the amounts that are traded on the relevant platforms have literally exploded since the outbreak of the Corona crisis. Experts warn of a bubble.

In simple terms, decentralized finance is about transferring traditional financial products from banks – loans, bonds, currency exchanges – to the crypto world. Since March, the volume of these virtual financial products has increased sevenfold to 7.5 billion dollars, as the industry service DeFi Pulse shows. Cyber ​​currency lending in particular is booming. This so-called lending alone accounts for $ 3.8 billion. Users lend their virtual coins – instead of keeping them in specially designed digital wallets – and receive interest for them. The interest rate is set in advance or is calculated daily by computer algorithms. The coins earned in this way can be exchanged for real money on special trading platforms.

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“Perhaps not all transactions are always entirely legal, but that doesn’t mean it won’t be any different in the future.” Proponents of cryptocurrencies are convinced that the DeFi offers have the potential to turn the classic financial world of banks on its head. The normal saver has long stopped earning money with interest only, and banks usually charge money for their services.

“Everything is going well as long as the technology is running”

Financial services via the blockchain – the technology behind cyber currencies such as Bitcoin and Ethereum -, on the other hand, are possible without a bank account, free of charge, available anytime, anywhere and transparently. “In the future, such channels may offer a bridge between the traditional financial world and the open blockchain world,” predict the experts.

Other experts warn against the risk of total loss. The cryptocurrency industry and the financial services associated with it are unregulated, and hacking attacks on trading platforms occur again and again.

According to industry experts, most cryptolending users are gamblers. For example, they borrow the crypto currency Ethereum, use it to trade other cyber currencies on various platforms, pay back their loans and pocket any trading profits they have made.

User interest has increased “enormously” over the past few months, says Stani Kulechov, founder of the largest lending platform Aave, which, according to DeFi Pulse, handles a volume of 1.6 billion dollars. The entire segment of DeFi financial products is able to regulate itself and does not need any external supervision, as it is determined purely by supply and demand and is transparent through the blockchain. “But everything can only go well as long as the technology is running.”