If I told you "1775," what comes to mind? Had someone asked me just now, I would have answered nothing; yet it is one of those years to be circled in red in the history of humanity. It was exactly in this year that the Hamburger Ersparungkasse was born, the first bank in the modern sense.
Since then the banking system has come a long way: but from an instrument that has allowed the development seen in the last three hundred years, it has now become a pachyderm, slow and often costly. In a world that runs at a thousand miles an hour, it sounds paradoxical to have financial system accessible in fits and starts, and endless bureaucratic times; If you've ever had to ask for a loan, you know what I'm talking about. And this is where DeFi comes to our aid, a technology that is still new but already in the sights of all the major banking institutions.
Before continuing, I want to dispel a myth: DeFi will not eliminate the banking system, but over time it will create alternatives and a faster, more accessible and more transparent system.
And the world of credit is one of those that will benefit the most from the advent of DeFi. Already today, five minutes and three clicks are enough to obtain a loan, and have the possibility of implementing advanced strategies to generate passive incomes.
Let's try an example: let's assume that 1 $ETH is worth $1,000, and we believe that the price will go down in the near future. We can therefore do the following:
We deposit $10,000 of a stablecoin, which will act as collateral (collateral);
We borrow $5ETH, or $5,000, which represents our debt;
We sell our $5ETH for $5,000 of the same steblecoin we used as collateral.
At this point, if our hypothesis is correct, we are ready to reap some excellent profits. In fact, if a few days later the value of $ETH drops to $500, it would mean that our debt of $5 ETH also has a dollar value of only 2,500 ($5 ETH x 500).
Since the debt is denominated in $ETH, we will just need to buy them back with the stablecoin previously obtained from the sale of the same borrowed $ETH, thus obtaining a profit of $2,500.
As you can see, this is a rather simple strategy, but one that has the great advantage of being able to be completed in a few minutes, in total autonomy, and without any bureaucracy. The potential of this type of platform is endless, the strategies multiple: all you need to understand is that you can use your own cryptocurrencies to get a loan, and it is then up to the individual user to decide how to invest the money received. Some people use them to increase their exposure to a certain asset, some to create passive income or some to make real estate investments. There is no limit to what can be done, what matters is to be aware of the fact that to unfreeze our cryptocurrencies we will have to repay the debt and that the same debt could be liquidated automatically if the value of the collateral falls below the threshold safety.
Since 2020, the birth year of DeFi, the volume managed by these platforms has steadily grown and, to date, manages approximately $14 billion of collateral: a figure that might seem large, but which represents only a crumb of that what it could become.
There are several reasons why this type of DeFi solution is able to offer better returns and an overall experience: the main one is the absence of intermediaries, which allows you to cut costs and make the process more transparent. Unlike traditional finance, DeFi does not rely on centralized third party entities, but relies on computer code and algorithms (smart contracts) that allow it to manage everything in total autonomy.
In conclusion, it must always be remembered that, although DeFi offers solutions for improvement in various aspects, it is still an experimental technology that brings with it risks that cannot be ignored. Among all, the most important aspect is always to make sure that the platform you are using is reliable: if we have any doubts it is always a good idea to check. Our advice, especially if you are a beginner, is to rely on the leading platforms in the sector and with the largest volumes.
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