What is DeFi?
March 07, 2023
Read Time 2 MIN
DeFi stands for “decentralized finance” and refers to the ecosystem of financial applications that are being developed on top of blockchain systems. DeFi may be defined as the movement that promotes the use of decentralized networks and open-source software to create multiple types of financial services and products. The idea is to develop and operate financial dApps (decentralized apps) on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols.
DeFi Use Cases
Currently, the three largest functions of DeFi are:
- Creating monetary banking services (e.g., issuance of stablecoins)
- Providing peer-to-peer or pooled lending and borrowing platforms
- Enabling advanced financial instruments such as DEX (decentralized exchange), tokenization platforms, derivatives and predictions markets
Within those fields, there are several types of DeFi services. A few other examples of products and use cases include funding protocols, software development tools, index construction, subscription payment protocols, and data analysis applications. DeFi dApps may also be used for KYC (know your customer), AML (anti-money laundering), and other identity management services.
Decentralized finance brings numerous benefits compared to traditional financial services. Through the use of smart contracts and distributed systems, deploying a financial application or product becomes less complex and more secure. For instance, many dApps are being developed on top of the Ethereum blockchain, which provides reduced operational costs and lower entry barriers.
How Do You Invest in DeFi?
The best way to gain exposure to the growth of DeFi is to invest in the protocols that enable it. At a fundamental level, it starts with smart contract platforms like Ethereum, and at a higher level, there are application-specific protocols in which one can invest. VanEck provides a straightforward, diversified and easy way to invest in a broad selection of smart contract platforms that support DeFi.
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Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
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Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
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All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
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