DeFi, short for “decentralised finance,” is a catchall name for the various types of banking that can be conducted on public blockchains like Ethereum. Earning interest, borrowing, lending, purchasing insurance, trading derivatives, trading assets, and many other banking services are all possible through DeFi, but with less hassles and in less time than through traditional banking. DeFi, like other forms of crypto, is accessible worldwide, operates on a decentralised, anonymous, peer-to-peer (P2P) basis, and is anonymous to the public.

To what end is DeFi useful?

DeFi builds on the concept of Bitcoin’s digital currency to provide a low-cost, fully digital alternative to Wall Street (think office towers, trading floors, banker salaries). This has the potential to make it so that everyone with access to the internet can participate in secure, transparent, and free financial markets.

For what reasons would this be advantageous?

No application or “opening” of an account is required. Simply making a wallet will get you access.

Anonymity: No real name or email address is required.

To put it simply, you may move your assets wherever you want, whenever you want, without having to wait for lengthy transfers to complete or pay hefty costs.

Rapid: Interest rates and prizes are frequently adjusted (sometimes every 15 seconds), and they may be much greater than those on traditional Wall Street.

This system is completely open and accessible to all parties concerned (private corporations rarely grant that kind of transparency)

In what way does it function?

Dapps (short for “decentralised apps”) are the primary means by which users interact with DeFi, and at present, the majority of these apps are built for and deployed on the Ethereum network. There is no need to fill out paperwork or open an account like at a regular bank.

Currently, people are using DeFi in the following ways:

Money lending: Put your cryptocurrency to work for you and get paid back in interest and rewards every minute of the month.

Borrow money without ever having to fill out any paperwork, even for short-term “flash loans” that banks and credit unions won’t touch.

You can purchase and sell equities directly with other investors using crypto assets in a peer-to-peer trading model.

Invest some of your cryptocurrency in alternatives to traditional savings accounts to get higher interest rates.

Making a long or short bet on an asset by purchasing a derivative. These are the cryptocurrency equivalent of stock options or futures.

Can you tell me the drawbacks?

Active trading on the Ethereum blockchain might become costly because to the fluctuating transaction rates.

Due to the immaturity of the technology, your investment could be highly volatile depending on the dapps you use and how you use them.

When it comes to the Tax, you’re on your own to keep track of things. The rules may change depending on where you are.