Although defi is a new technology, its growth since inception has managed to attract the attention of not only retail investors but big players as well. I think the interesting question is why. So here are some of my thoughts about where we stand and where we are heading.
Decentralized finance or defi for short is the expansion of use cases for cryptocurrencies. Consider it banking or finance institutions just for crypto, naturally, they are supposed to be decentralized and permissionless. In essence, it allows you to participate in token lending or borrowing as well as participating in the launch of new projects through liquidity providing.
I know it might be difficult to grasp at first, but the amount of use cases is ever-growing.
Now let's overview the potential, if you notice the talks of the users of ethereum a lot of them are complaining about the fees for transactions, this creates an incentive to offer alternatives, right now there are plenty starting with Solana or avalanche and also atom and many more.
These tokens have new projects launching on their ecosystems and allow people to earn yields on their staked tokens. Nothing new here, but let's compare this with our current financial system, for many years the gold standard for investing was 60/40 stocks and bonds portfolio, however, this is not the case anymore.
Just think about a high-yielding bond that can offer 6-7% annual return, which is barely enough to cover the current "official" inflation rate, so it is in fact possible to have a high-yield bond and get a negative real yield.
Naturally, this creates demand for alternative investments and I would argue that this is what causes such a high interest in defi protocols. First of all, it offers to participate in a sort of initial coin offerings by providing liquidity, so you can literally invest your token to mine new tokens of the promising project and get a very high annual percentage, 3 digits in some cases.
Of course, there is no such thing as free lunch, and with great yields come significant risks, such as code failures or rug pulls, however, we are very early and I'm sure defi has the potential to grow into something very big if it has not done so yet.
