The bull market in bitcoin over the past year has caused even the biggest skeptics to change their minds. From economists to hedge fund managers, the world is opening up to technology, and at the center of this movement is decentralized finance, or DeFi. At a time when the market capitalization of all cryptocurrencies has reached $2 trillion, making it equal in value to Apple, the promise of DeFi – now only a small corner of the blockchain industry – is attracting the attention of institutional investors.
As bitcoin’s (BTC) uptrend continues, interesting crypto products are developing. Some services offer returns of up to 8% on bitcoin holdings. For investors who are already expecting values to rise, this can be incredibly useful for maintaining cash flow without selling assets.
The three main factors driving institutional interest in bitcoin are the current historically low interest rates, inflation rates and geopolitical instability. With interest rates expected to remain close to zero for the foreseeable future, investors are getting ready to shift their funds into alternative assets.
The Fed’s 2% inflation target has investors worried about devaluation, and with tensions between the US and China running dangerously high, US dollar portfolios are becoming riskier by the day.
Buying, storing and using cryptocurrencies safely is still a real challenge – much harder than opening a bank account. However, according to Larry Fink, CEO of BlackRock, a global investment fund that manages about $9 trillion, bitcoin has the potential to become a global asset and reach new heights in the coming years.
In the traditional financial system, money markets are components of the economy that issue short-term funds. They generally deal with loans of one year or less and offer services such as borrowing and lending, buying and selling, with wholesale over-the-counter loans. Money markets consist of highly liquid short-term assets and are part of a larger system of financial markets.
Money markets have traditionally been very complex, with expensive overheads and hidden costs driving most investors to a fund manager. However, their existence is of paramount importance to the functioning of the modern financial economy. They encourage people to borrow money in the short term and use that capital for productive purposes. This improves overall market efficiency and helps financial institutions achieve their objectives. In fact, anyone with extra money can earn interest on their deposits.
Money markets consist of different types of securities, such as. B. includes short-term government securities, certificates of deposit, repos and unit trusts. These funds typically consist of $1 shares.
On the other hand, the capital market is dedicated to the trading of long-term debt instruments and equities and refers to the entire stock and bond market. With a computer, anyone can buy or sell assets in seconds, but companies that issue shares do so to raise funds for longer-term transactions. These assets fluctuate and, unlike money market products, have no maturity date.
Because money market investments are virtually risk-free, they often have tight interest rates. This means that they will not show significant gains or growth compared to riskier assets such as stocks and bonds.
DeFi against the world?
Institutions have begun using bitcoin to hedge against currency risk, and retail investors are following suit. More than 60% of the outstanding bitcoin stock has not moved since 2018, and BTC is expected to reach over $100,000 in the next 24 months.
If the current trend continues, investors will continue to accumulate BTC stocks. But while much of the world’s leading stock cryptocurrencies remain in vaults, the DeFi industry is constantly producing alternative platforms for interest payments through smart contracts, increasing transparency by allowing investors to see and track the money on the blockchain.
Average returns on DeFi products are also much higher than traditional money markets, with some platforms even offering double-digit annual percentage returns on deposits. From asset management to testing smart contracts, DeFi-Space creates a decentralized infrastructure for scalable money markets.
According to Stani Kulechov, co-founder of Aave DeFi Protocol, returns are high in bull markets because more capital is raised and the cost of margin increases returns. DeFi’s new innovation uses more boxes, which further increases efficiency. If there are no new capital injections – these rates could be stuck for some time, he said.
The Ethereum network now hosts the majority of DeFi applications, prohibiting the use of tokens not available on the network to participate in decentralized funding. Bitcoin, for example, while the largest cryptocurrency in terms of market capitalization, has only recently made its way toFi platforms.
Looks like it: DeFaye in crop production, explains.
Kava’s hard protocol allows investors to harvest bitcoin and other non-ERC-20 tokens like XRP and Binance Coin (BNB). Backed by big names (Ripple, Arrington XRP Capital, Digital Asset Capital Management, etc.), these platforms allow users to put their cryptocurrencies into a pool of assets that is leased to borrowers to earn interest.
The team also plans to add support for Ethereum-based tokens in the near future. The network upgrade to Kawa 5.1, which was postponed until the 8th after the required quorum was not reached. April will also see the entry into force of version 2 of the Hard Protocol, which includes strong incentive systems and improvements to the governance model.
Most of DeFi’s loans are over-collateralized, meaning the pool always has more money than it lends. If the value of the tokens issued falls, the funds in the pool are liquidated to compensate.
According to Anton Bukov, co-founder of 1-Inch, a decentralized exchange aggregator, blockchains are the first objective – very limited, but ultimately fair – powerhouses and could enable new services and interaction flows in the future. Developers are doing their best to remove the possible unfairness of existing flows and invent new flows by replacing the middleman, he said.
By creating an automated platform for borrowing and lending assets, decentralized finance enables money markets without intermediaries, custodians or high infrastructure costs.
Fair trade labour
Among the many areas that the DeFi has developed in recent years, arable farming has attracted much attention. Farming is when the network rewards lenders with tokens that can be invested in other platforms to generate more cash tokens.
The concept is simple, but yield farmers are among the most vigilant traders. They constantly adjust their strategies to maximize their returns and track their bets on all platforms to ensure they get the best deals. The potential returns could be unimaginably high, but it remains to be seen whether cash farming is just a fad or a production phenomenon. added Kulekhov:
Performance farming is simply a means of enabling users and stakeholders to manage. What really matters is whether the product itself finds a market/profitability. Agricultural energy distribution management has been most successful with protocols that had found a market/profit protocol prior to these programs.
High yield farming has an incredibly positive feedback loop, as more participants increase the value of the management symbol, leading to further growth. According to Brian Kerr, CEO of Kava, this feedback loop can have very positive results in bull markets, but the exact opposite in bear markets:
It will be up to the management teams of the various projects to effectively navigate the bear markets and set aside profits before a fatal spiral occurs. Bull or bear market, agriculture will be an important part of blockchain projects in the coming years.
Money markets are the backbone of our global financial system, but most transactions take place between financial institutions, such as banks, and other entities in the time deposit markets. However, some of these transactions find their way to consumers through money market funds and other investment vehicles.
Decentralization is the next frontier of finance, and as big investors continue to work with the DeFi space, a decentralized economy seems almost inevitable. Participating in a growing environment may be a risky proposition today, but what decentralized financial platforms learn today will be the foundation for robust DeFi applications of the future. Bukow says the higher interest rates on DeFi platforms are absolutely sustainable. He added:
High returns usually come with higher risks. Thus, the risk-return model for all these options is always close to equilibrium. Normalization of risk will reduce benefits because more participants will join to share the reward.
From clever contract mistakes to unauthorized community theft, the DeFi Room is a place of wonders and nightmares. DeFi-based harvesting platforms are still in their infancy, and while the numbers can be too tempting, it’s important to do your own research before investing in any platform or asset.
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