Cryptocurrencies have long been heralded as the future of finance, but it wasn’t until 2020 that it finally caught on to an old idea: making money with money. In the crypto world, decentralized finance (or DeFi) encompasses a wide array of blockchain-based applications intended to enhance cryptocurrency holders’ returns without relying on intermediaries — to earn the kind of passive returns an investor might get from a savings account, a Treasury bill, or an Apple Inc. bond.
What Happens When Cryptocurrencies Earn Interest?
Of all of the disruptive possible uses of blockchain, decentralized finance (or DeFi) might be the one most likely to bring this technology to a wide audience — and challenge the established finance industry in the process. By using self-executing contracts on newly formed marketplaces, DeFi allows users to stand in place of large institutions to loan and borrow money to each other, and to earn interest and fees by doing so. DeFi offers new opportunities to make money, such as “yield farming,” which often resemble traditional finance strategies. But it also offers a large-scale update to the basic plumbing of financial markets such as NASDAQ and the NYSE, offering more efficiency, transparency, and trust. There is significant risk inherent these crypto markets, but DeFi offers a less volatile and more accessible point of entry than other markets — and may just have enough appeal to bring blockchain into the mainstream.