ON DENTRALIZED FINANCE (DeFi) -2
In our previous article, I tried to answer some questions that confuse people about DeFi’s philosophy, what it is and what it is.
In this section, since it is a new technology concept, I will briefly touch on the risks it contains and the horizons it opens.
Is Investing in DeFi Risky?
According to many researchers, fraud and money laundering remain a major problem in the cryptocurrency ecosystem.
According to reports and data that you can obtain with a short search on the Internet, 14 billion dollars of crypto money was sent to illegal addresses in 2021. This is almost double the figure seen in 2020. Money laundering has always been cited as a handicap of the crypto ecosystem.
I won’t say this is wrong, but is there no money laundering in the traditional finance ecosystem? Again, with a short search on the internet, you can see how many TRILLION dollars of suspicious transactions and money laundering transactions are in Europe’s big banks.
As we all know, in 2012 HSBC admitted to laundering $881 million for drug cartels in Latin America. Therefore, since criminals do this through traditional finance mechanisms, can we consider traditional finance mechanisms as criminals? Or do we refuse to use it just because such transactions have been made?
In fact, transactions made on the blockchain, which is a new technology, are public and auditable. I think that with the arrangements and regulations to be made, this work can be overcome more easily than the traditional system.
In 2021, $7.8 billion worth of cryptocurrencies were stolen from DeFi protocols. About $2.8 billion of this figure resulted from a type of fraud called ‘rug pull’.
Investors need to be very careful in this regard, because in any project, the developers do not write that we will do rug pull. On the surface they look like they are a normal project. In my previous article on the subject, I wrote about how you should conduct project reviews. There you can find information on this subject.
Apart from this type of scam, hackers can exploit sensitive aspects of smart contracts of a DeFi protocol. Since smart contracts are computer code, it is quite possible for them to install malicious software inside these codes and steal people’s investments thanks to this software.
In order not to be exposed to such situations, it is necessary not to jump to tokens that have not passed code control. Code auditing is the process of analyzing and publicly validating smart contract codes of a token or DeFi project by an independent firm that is not within the project.
Apart from the risks briefly explained above, it is also necessary to pay attention to the Temporary Loss (IL) situations that may occur in liquidity pools created in DeFi protocols.
Let’s say you want to earn passive income by funding the liquidity pools that I mentioned in the first part of my article, with the assets you own and by funding that pool over a certain parity (For example, ETH/USDT). You invested your assets in this pool. The price of the asset you deposited has changed. With the AMM code trading ratio account (a $10,000 pool should always be $5000 ETH, $5000 USDT) it always fixes the ratio of the inside assets.
After this change, when you decide to withdraw your money, the difference between the price of the amount of ETH you will receive and the current price of the amount you initially deposited will be created. This difference is called temporary loss. While you are calculating that you will earn a lot from the investment, you may lose money as a result of this transaction.
However, since you will get a share from every transaction made in the liquidity pools, your loss can be balanced. The reason why I am talking about this issue is that it is necessary to know that there is also a strategy to earn passive income. I deposited the money, it is not correct to think that I am already making money automatically.
There is no regulation or insurance on investments in DeFi. DeFi loans are also backed by crypto assets. Due to its high volatility, assets in the market can lose value rapidly. In addition, lost data from banks and account information such as passwords can be recovered. If you forget your passwords and account information while trading DEXs, your investments can be irreversibly lost.
DeFi’s Contribution to Our Lives and Its Future
In the last few years, DeFi has managed to bring a sweeping change in the world of finance. Transactions on DEXs have gained immense popularity due to the fact that there are no middlemen. DeFi projects and DEXs around the world are challenging the traditional financial system by providing easier access to financial transactions with low barriers to entry.
Today’s insurance system makes people suffer because of its complex control systems, paperwork and bureaucratic procedures. Insurance companies can draw a side when an unforeseen or unforeseen situation occurs. They are always trying to justify themselves legally.
I think that smart contracts can be a balm for the suffering that insurance companies inflict on their customers. Currently, some DeFi projects offer insurance recommendations for cryptocurrencies. Rising inflation rates in fiat currencies have made saving and investing difficult for middle-class people around the world. Some projects have produced solutions for risk-free savings and investments with the strategies they have developed. Thus, in the future, we will see very good projects where the risks are reduced.
Borrowing and lending protocols have also become one of the main applications of DeFi. Some DeFi projects focus on the peer-to-peer (P2P) borrowing and lending market. Distributed ledger technology (DLT) has made transactions faster. Additionally, the DeFi ecosystem has introduced NFTs into our lives.
In my opinion, the most effective use of DeFi was in the gaming industry. Games and sports events have emerged as major markets for DeFi technologies. Game developers use DeFi tokens and NFTs to sustain their game economy and monetize their users.
Perhaps, thanks to DeFi, developers began to realize their dream of the “metaverse”. Before DeFi, the assets you could have in-game were used to skip the levels of the game and improve the features your character could do. This allowed players to just keep playing the game and get some pleasure in return for the game.
Players were becoming a kind of gamer to experience this pleasure and compete in the higher rounds. We used to see the game as a pleasure tool to be played only in spare time. But with the opportunities provided by DeFi, the play and win strategy emerged.
Thanks to these opportunities, game lovers started to earn income. Thanks to young people or children spending time in front of the computer, parents began to be interested in the game. Young people started to contribute to the home economy by playing games.
Also, some DeFi projects got their hands on sports competitions. Money started to be earned by holding the token of the team you are a fan of. When his previous support team suffered a defeat, the fans were like, “What’s wrong with me? It’s like they give me money when you beat it,” he thought.
Right now, I can easily say that if you have the token of your favorite team, yes, you can earn more money when the team wins. There are several similar DeFi projects available. This is not a bet or a gamble. With the opportunities that DeFi offers us, it appears as an investment type.
The aforementioned advantages of using DeFi explain why it has been on a breakthrough in recent years with a market cap of $128 billion. Before moving on to this subject, I would like to point out that; We did not have full control of our money and our investment in the traditional financial system.
For example, sending money outside of working hours is among the problems we all experience. Especially if you were sending money abroad, it was more difficult. In addition, our passwords and usernames were known to the institution. Thanks to DeFi, we have complete control over our money. Our passwords and wallet security words are personal only. Only the person is responsible for the actions taken. This is among the innovations it has added to our lives.
Centralized systems still dominate the market due to user-friendly interfaces, security, regulatory processes and insurance possibilities.
As more people enter the crypto-asset space, DeFi will need to expand its capabilities and become more robust in terms of security and scalability. This has already started with the upgrade of the Ethereum network to Ethereum 2.0. I am confident that in the near future, DEX will accelerate the growth of decentralized finance and its supporting mechanisms by making cryptocurrency trading more fair, private and independent. We will see together what new innovations will come into our lives thanks to DeFi.