DeFi Apps Draw Investor Attention
DeFi Apps Take on Financial Services
DeFi, short for decentralized finance, is a new area of cryptocurrency garnering a lot of attention from investors. DeFi uses public blockchains to offer a range of financial services. Through DeFi applications, individuals can borrow money, lend to others, trade assets, and engage in other finance-related activities.
Since DeFi services only work for digital currencies, they are typically used by people who want to borrow against their crypto assets to make larger bets. In a DeFi transaction there is no middleman. Instead, everything takes place through a decentralized app or dapp. These applications largely run on the Ethereum network, connecting to users’ digital wallets. The transactions are automated from start to finish.
DeFi Sparks Crypto Volatility
DeFi apps provide cryptocurrency holders with a way to invest their assets and potentially make more money from their crypto holdings. However, some DeFi apps enable investors to place leveraged bets, through the use of derivatives, which has resulted in increased volatility in the crypto market. Some see this as having contributed to the recent crypto selloff. As prices have fallen, many bullish bets were automatically liquidated, accelerating the downward trend.
DeFi platforms have amassed more than $100 billion in assets deposited as collateral, $64 billion of which is on Ethereum. For context, just last year Ethereum had only $1 billion in DeFi assets on its platform.
The Rise of Leveraged Bets
Investors are taking on more leverage not only in the crypto space, but also in the stock market. As of April, investors have borrowed $847 billion against their investment portfolios, a new record. Margin debt accounts for 2% of the $49 trillion in US stock market assets. For crypto, the equivalent figure is 6%. Margin debt becomes even riskier during periods of volatility.
DeFi apps are unregulated and in some cases operated anonymously. They are causing volatility in the crypto market and have little in the way of protections for investors. Nonetheless, investors are flocking to this new part of the crypto market. It will be interesting to see what comes next in the world of DeFi.
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