It all started with the cryptocurrency boom in recent years, but blockchain technology is about far more than investing in digital money. A slew of new crypto projects has popped up, trying to capitalize on what has become known as the “decentralized finance” movement, or DeFi.
Does DeFi put your traditional money and investments at risk? Probably not. But it’s nonetheless an important technology that could revolutionize financial markets and services in the decades ahead. Here’s what it means for you personally.
What is DeFi?
In simple terms, DeFi refers to a digital financial exchange without a middleman. By using blockchain technology (a software-based ledger system distributed among owners of a token or digital coin based on its blockchain), two or more parties can execute a business transaction without the involvement of a bank or financial institution. When using cryptocurrencies to complete an exchange of value, the transaction is completed with no fiat currency issued and distributed by a federally governed central bank.
So what’s the big deal? Various parties involved in DeFi have their reasons for using it. Some have grown weary of the financial system controlled by governments and are looking for ways to disrupt the status quo. Others see a more efficient, affordable financial system that works better for the digital economy, and that removes often slow and costly intermediaries (every party that touches money or is involved in a transaction gets paid, somehow). And given the massive and still-growing size of the digital payments industry (trillions of dollars change hands every year), other DeFi projects are simply just trying to get in on the action.
Whatever the reason, numerous DeFi projects have popped up in recent years. Some only aim to cash in on the cryptocurrency boom and have limited merits, but others are building actual financial services (like payments, loans, and other banking products) built on a blockchain network like Bitcoin or Ethereum (CRYPTO:ETH). Ethereum is a particularly popular platform for DeFi services, commanding a 66% share of the current DeFi market as measured by the total value invested in these projects. However, it’s still early days for the DeFi movement, so a complete upheaval in the global financial framework isn’t going to happen anytime soon.
Getting started on your DeFi journey
But what does DeFi mean for your investments? A basic tenet of investing is accepting that the economy and business world are constantly changing, and DeFi’s most immediate effects could be on companies in the greater financial services space. Many of these incumbent firms, like Visa, Mastercard, and PayPal, are already experimenting with blockchain technology in some way to stay in step with the times.
However, the crypto and blockchain world are evolving quickly, and some companies are pushing for change sooner rather than later….
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