The Frenzy Around DeFi Coins Explained
October 26, 2020
Add: Anton Dzyatkovskii
A few minutes into a conversation about cryptocurrencies, you’ll hear the word ‘DeFi’ thrown around a lot and you can’t help but gape in bewilderment.
What is the huge deal with DeFi coins and why are they so popular?
If you remember, there was a similar craze around Bitcoin in 2017 when its price edged towards $20,000 and the value of other cryptocurrencies and tokens soared as a result. The price fluctuation of earlier crypto assets like Bitcoin and Ethereum has seemingly mellowed out. More players have entered the game with innovative blockchain applications. Traditional industries are slowly getting on board with the idea of cryptocurrencies, investors who had earlier been skeptical about cryptocurrencies and blockchain in general are diversifying their portfolio with crypto assets, pushing the price of newbie digital coins to record highs.
This phase of enthusiasm reflects the rapidly maturing world of cryptocurrencies. Their gaining momentum shows that the mass adoption of DeFi is no longer a distant dream. In fact, at the time of writing this article, the total value locked (TVL) in the Crypto DeFi Markets has hit an astounding $9.5 billion from a little over $1 billion in Feb 2020.
This article will throw light on all aspects of DeFi and how you can financially benefit from the new buzz.
What is DeFi?
To put it simply, DeFi stands for decentralized finance. An open finance movement, DeFi applications make use of blockchain technologies like smart contracts, decentralized ledger systems, cryptographic hashing and token-based reward systems, replacing all middlemen and central authorities with program codes. This is how the blockchain community intends on improving the efficiency of financial services and minimizing service costs.
To cite an example, Bitcoin and Ethereum are some of the earliest DeFi applications. Rather than being controlled by central authorities, activity on the platforms is monitored by large networks of computers. Today, these coins, especially Bitcoin, are used like Gold as a hedge fund against inflation and sudden economic downturns. Ethereum’s role has been more about crowdfunding to help startups venture into business.
But new applications are popping up on crypto exchanges every other week and becoming the talk of the town in a matter of days, owing to their high volatility. High volatility comes with high yields as well as potentially high risks, which is not everyone’s cup of tea. The same feature is preventing the mass adoption of Bitcoin as an alternative to traditional currencies in day-to-day transactions. But the community has a solution for that too! New coins whose values are pegged to that of the US dollar have been increasingly gaining popularity. They are practical for everyday purchases.
Importance of DeFi Assets
We like to take our sweet time to get adapted to new technological applications, no matter how massive the claims they make are. While a very small percentage make the plunge at the earlier stages, most of us like to wait and see how well things will go. The case is the same for blockchain technology and DeFi applications.
Just like machines replaced labor, electricity replaced kerosene lamps and phones replaced postal letters, DeFi applications have the potential to gradually replace the financial institutions that we rely on today.
Strictly adhering to the terms and conditions laid down in smart contracts, DeFi applications will:
1. Receive and manage deposits
2. Handle collateralized loans
3. Liquidate collateral assets
The codes on the contract cannot be terminated or used by any party to their own advantage. And one of the most interesting facts is, once the contract is approved, nobody, not even the developers of the project, can draw the funds out of the capital pool. Investors can sit back and relax once they have plowed their money into a project. The project will be executed as specified in the smart contract.
DeFi applications will be a decentralized, democratic alternative to all the financial services we use today, from trading, savings and loans to insurance and more. Everyone with access to a smart device and an internet connection will be able to use DeFi applications and make transactions using DeFi coins. Since DeFi digital assets are built on Ethereum codes, they usually exhibit the same characteristics.
Finance is often an issue of national security. DeFi, combining safety and transparency, will shorten the financial distance between people. Mass adoption of DeFi based applications will pave the way for a world without borders, from a financial point of view. If the government takes part in the initiative and does their bit, we will be able to make sure that the technology is not manipulated by hackers and criminals for their gain.
How are DeFi Coins Mined?
The words ‘mining’ and ‘minting’ in the crypto world are analogous to real-world mining and minting.
In mining, resources are expended to unearth coins – Bitcoin is mined by high-power computers that draw significant amounts of electricity. The backing for Bitcoin is provided by electricity and computational powers. They are limited in number most of the time – the total number of Bitcoins that can be mined is 21 million. Once miners have unearthed all the coins, it will be exhausted, just like gold and other natural resources, shooting the price up of the coin even further. But the possibility that Bitcoin’s protocol will be changed in the future to expand its supply can’t be ruled out either.
On the other hand, there is no upper cap on the number of Ethers that can be mined. Ether is a cryptocoin generated on Ethereum platforms for miners as a reward for the computation services they offer to secure the blockchain. It serves as the platform for over 260,000 different cryptocurrencies including many of the top 100 cryptocurrencies in the market today. Unlike Bitcoin, which has its supply limited to just 21 million in number, Ethereum has not yet set an upper limit on its supply.
Minting is another way DeFi coins are generated. It is used to inflate the circulation supply and requires little to no resources. They have no upper cap most of the time and their value is determined by the growth of the DeFi platforms and the trust the community places in them. Minting has to be approved by selected authorities. To prevent excess inflation, minting is controlled rather than stopped.
3 Ultimate Ways to Make Money on DeFi
Investing is a great way to make money through DeFi if you are willing to hold your assets for the long term, say 5-7 years. Bitcoin, which was worth basically nothing from Jan 2009 – Mar 2010, slowly picked up and stands at 11,897.90 dollars as of now. More coins with huge potential are coming up; after careful scrutiny and assessment, purchase a coin that suits your requirements and deposit it into a wallet for a longer time frame.
Crypto assets that are generally considered highly volatile are also highly profitable in the long run. A research conducted by the investment firm Fundstrat reveals that the majority of Bitcoin profit comes during the 10 best trading days of the year. Missing these days from 2013 and 2018 would have cost you a negative 44 percent annual return.
Trading and investing follow the same rules but differ in terms of time frame. Investing is essentially a long-term commitment, whereas trading exploits short-term fluctuations in values. While anyone with adequate money can venture into crypto investing, trading requires certain skills and experience to master and make profits. You should be able to scan through the charts and understand the technical indicators to be a good crypto trader. You need not have an in-depth knowledge of blockchain, its different aspects or the project the DeFi app is focusing on, but you should develop an understanding of price fluctuations and be able to predict future prices on a short-term basis.
The old school way of making money using crypto, mining is one of the most important parts of the Proof of Work (PoW) consensus mechanism. It involves verifying transactions and securing a PoW network for a reward in new coins. Although mining could be done using a simple desktop in the earlier days, today there are supercomputers with highly specialized mining hardware which make the job much easier. Mining requires in-depth technical knowledge and a significant amount of investment.
How QDAO is helping mass adoption of DeFi
A quick look at DeFi Pulse and you’ll find many platforms and asset management tools that offer you the opportunity to enter the exciting world of decentralized finance. QDAO ecosystem is among the leading digital assets ecosystems that offer DeFi services to a global audience. QDAO recently launched QDAO DeFi: QDeFi.io – a decentralized financial services platform that offers a variety of financial services. The QDAO ecosystem is powered by the USDQ stablecoin, its very own in-house cryptocurrency that is pegged to the US Dollar.
The unique QDAO DeFi platform offers financial services just like traditional institutions, only these services have digital assets (cryptocurrencies) at their core – loans; stocks of reputed global companies; and yields (interest) on assets. This makes the entry hurdle almost non-existent and opens up financial possibilities for a truly global audience. QDeFi endeavors to promote the mass adoption of DeFi and help it reach the people who need it the most.
With tech enthusiasts and investors across the world joining hands together, DeFi is evolving by the day. Contrary to popular belief in the past, DeFi is not a short-term frenzy, it is here to stay. A blockchain revolution in the finance sector is underway. Invest in QDAO coins and earn passive income through the safest possible method!
This article was prepared with the help of Anton Dzyatkovskii and Dan Khomnko from Platinum Software Development Company.
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