What is more, it provides liquidity to ETH holders. While retaining ownership of ETH, holders have access to a liquid and non-volatile fund (DAI) for trading cryptocurrency with leverage, or other purposes. If the price of ETH increases during the loan period, their collateral will increase in value as well, thus earning more when they pay off the debt.

Despite the consistent increase in MakerDAO’s annual stability fees over the past few months, the fee has drastically reduced from 18.5% to 12.5%. It was once criticized for fluctuating too much and setting too high.

Benefits of DeFi

Easy access with untapped resources

The unbanked population can gain access to financial services such as savings, payments, loans, mortgages and insurance services. With access to the internet and a few clicks to create a crypto account, DeFi opens up unparalleled opportunities for people to control their assets, invest and trade, with minimum to zero barriers. They can even put their cryptocurrency in the wallet and earn interest and borrow money without any credit history but only with crypto as collateral, making it easy for start-ups to grow.

Interoperability

It provides more options when taking out loans or lending crypto. For example, after taking out a DAI loan from MakerDAO, users can convert it to other cryptocurrencies to gain leverage, creating different possibilities for other investments.

Cheaper, efficient and convenient

As everything is built on blockchain, financial services will never be the same. We can enjoy high efficiency and save costs, as the charges we pay for banking services cease to exist. You can imagine cross-border assets transferring quickly with zero transaction fees. Also, in politically or economically unstable countries, where inflation is serious,and loans are difficult, DeFi provides an option for residents to exchange their deposit into cryptocurrency, which could serve as a store of value.

More resilient and transparent

DApps rely on smart contracts, which are open-source and interoperable. This helps developers to understand more about different products and create and contribute different valuable projects to the whole DeFi space.

Downsides of DeFi

Fiat on/off difficulty for crypto

Too few platforms provide services to convert fiat money to crypto. At the same time, it is generally hard to redeem crypto loans for fiat currencies. As a result, it might be difficult to utilize the borrowed funds in the real economy.

DApp usability

Investors hesitate to explore the possibilities of DeFi since the public in general lacks knowledge about the space. They are unfamiliar with smart contracts and could easily lose money just by inputting an incorrect wallet address. Although it can be easily solved, it still stands as a barrier against broader DeFi adoption.

 

This article was first seen on the Daily Hodl and can be found here: https://dailyhodl.com/2019/09/26/introduction-to-decentralized-finance-defi/

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