DeFi (Decentralized Finance) is a way to use financial services without having to rely on centralized entities such as banks. These services are provided through decentralized applications (dApps) and processed via a blockchain, in the form of so-called smart contracts. Such digital contracts can be loans, sales contracts, insurance policies, or the trading of securities. All this without a bank or intermediary and much faster than in traditional finance.


There are two main ways to get exposure to the fast-growing DeFi sector. The most straightforward approach is to directly invest in the native tokens of DeFi protocols with the goal of benefitting from the potential price increase as the projects expand.


The other approach is to implement yield farming strategies. In a nutshell, yield farming is about locking cryptocurrency with a DeFi protocol in order to generate a return. The locked crypto funds act as collateral as well as provide liquidity to the platform.

 

How do I make money with DeFi?

 

DeFi offers several ways to grow your money, the most important of which are:Staking: locking tokens into a smart contract to receive more of the same token in return. Yield Farming: You provide liquidity in a DEX and receive tokens, according to your pool share. These can then be locked into Yield Farms, giving you more of the same token or a different token.

Lending: you receive Annual Percentage Yield (APY) for locking assets into a smart contract. These tokens are then used by borrowers who pay interest, a portion of which is returned to you.

 

Is investing in DeFi safe?

 

No, it's risky. Many believe DeFi is the future of finance and that investing in the disruptive technology early could lead to massive gains.

But there are also risks. Above all, technical risks due to problems with protocols, hardware or software must be taken into account. Smart contracts for example are error-prone and could also be attacked by hackers. So, the most important rule of investing applies: never invest money that you can't afford to lose.

 

How will Ethereum 2.0 impact DeFi?

 

Ethereum's shift from Proof of Work (PoW) to Proof of Stake (PoS) is one of the most anticipated events in the crypto industry. The original Ethereum blockchain is struggling with performance issues and increasing transaction costs. The new network is expected to solve these problems, which would improve the whole DeFi ecosystem's performance.