Decentralized finance (DeFi) took the world of crypto by storm in 2020. And, though the hype had cooled down somewhat by the end of last year, we are still seeing signs of its growing popularity now, well into 2021.
DeFi is all about utilizing blockchain solutions to provide conventional financial services. This is done via smart contracts, without government or corporate control, and without the need for intermediaries, which significantly shorten the time it takes to conduct operations.
This field is now subjected to great interest because the option of having blockchain-based alternatives to conventional banks or brokerages is gaining in value and popularity. The idea here is that DeFi, with a proper governance approach, can make payments more transparent, democratizing access to global finance for everyone.
The value of DeFi is continuing to skyrocket – recent statistics show that in February 2021 the total value locked in DeFi projects eclipsed $40 billion. For the sake of comparison, at the beginning of 2019, this figure was around $40 million. The difference speaks for itself.
That said, it is not as if the DeFi field holds no risks. High levels of volatility in this market make the impermanent loss a fairly common occurrence – when the price of a DeFi token goes down compared to its original value. Many projects have gone through this last year.
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Another danger comes from hackers, who have increasingly targeted this field in 2020. And, in 2021 the most recent examples would be Yearn.Finance in February ($11 million lost) and DODO in March ($3.8 million lost).
Scams are an important thing to look out for. The open nature of DeFi has led to a great number of pump-and-dump schemes, fake giveaways, exit scams, etc. According to blockchain analytics company CipherTrace, exit scams, in particular, made up 99% of crypto fraud schemes in the second half of 2020, allowing criminals to get away with about $1.9 billion in stolen funds.
But even with all that said, people keep on believing in DeFi and the growth continues. We have observed that high-value clients, corporates and institutions are getting particularly interested in this sector as they want to invest major sums. The presence of such demand is integrated DeFi support, giving clients access to more financial tools of choice.
To sum up, it can only be said that DeFi could offer investors a very rewarding experience, but this can only happen if they approach decision-making with prudence.
Konstantin Anissimov is an Executive Director of CEX.IO