The DeFi platform goes beyond holding and trading, allowing anyone with an internet connection and a digital wallet to earn passive income – a wealth-generating tool traditionally limited to those already privileged to own wealth, helping millions of people break free from poverty.
In the financial world, DeFi (or “decentralised finance”) refers to services offered by public blockchains like Ethereum, which are decentralised. You can do most of the things that banks offer – earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more – with DeFi, but it’s faster and requires no paperwork. As with crypto in general, DeFi is a global, peer-to-peer (meaning directly between two people without being routed through a centralised system, pseudonymous, and open to all). There are often risks associated with each service, so it is recommended that you research the DeFi risk before using the service.
What are the main benefits of DeFi?
DeFi’s main benefit is easy access to financial services, especially for those who are isolated from the existing financial system. Furthermore, it has the potential to create entirely new financial markets, products, and services due to its modular structure; Interoperable DeFi applications on public blockchains can create entirely new financial markets, products, and services.
Traditionally, finance relies on intermediaries, such as banks, and other institutions, such as courts. DeFi does not require any intermediaries. Disputes are resolved according to the code, and the users retain control over their funds at all times. However, with DeFi, low-income individuals can also benefit from a wide range of financial services at significantly reduced costs.
Fast-growing DeFi challenges and risks
In the last year, the amount of money moving around the DeFi market has increased significantly. A few months ago, it reached the $1 billion mark at one point. A few months ago, it reached the $1 billion mark at one point. The challenge is that there is no investor protection system.
Rug Pull is one of the common risks in DeFi.
A rug pull is when someone on the project management or development side steals liquidity (funds) from the liquidity pool of DEX.
This is one of the highest possible risks associated with DeFi due to the fact that the pool is taken away by the operation/development side. There have been a number of RugPulls in the past, and this is one of the risks associated with DeFi.
Deposit loss: Impermanent loss
A permanent loss should be considered when providing liquidity for return purposes on the DEX.
This is a risk common to many services, so it’s a good idea to keep it in mind when using DeFi. There is, however, a daily fluctuation in the price of virtual currencies.
As a result of liquidity being provided, currency pairs fluctuate in price, and the balance between currency pairs changes. Whenever such fluctuations occur, there is a permanent loss. The percentage of price fluctuation correlates with the percentage of loss. The problem of impermanent loss arises from “price fluctuations between currency pairs” (irrespective of whether the price is above or below).
Because of this, even if a price fluctuation of 5 times occurs, if both currency pairs that provided liquidity have the same price fluctuation of 5 times, then there will be no impact loss. There is no permanent loss if the price fluctuates in only one currency.
A large amount of tax payment
In most cases, cryptocurrency-related taxes can be complicated, but when it comes to operating with DeFi, they are more difficult.
Additionally, since DeFi has just become popular, there are not enough tools to calculate taxes, so the situation remains extremely inconvenient. At this time, you may be subject to tax payment in the following actions/procedures that accompany the use of DeFi.
