One of the most impressive features of DeFi (decentralized finance) is its ability to create new avenues for investment, with new opportunities emerging for cryptocurrency holders daily. This new financial system is empowering individuals to participate in a wide range of financial activities traditionally exclusive to institutional players. So in this article, we’ll take a look at how DeFi is diversifying the investment market and expanding the options available to investors.
DeFi platforms offer decentralized lending and borrowing protocols that allow individuals to lend their digital assets and earn interest or borrow assets against collateral. This opens up avenues for passive income generation and provides access to credit without the need for a traditional bank. By eliminating intermediaries, DeFi lending and borrowing enable users to directly interact with each other in a trustless and transparent manner.
Traditional exchanges often require a centralized intermediary to match buy and sell orders. DeFi introduces decentralized exchanges (DEXs) that operate without intermediaries, allowing users to trade digital assets directly with one another. DEXs provide liquidity, enable instant trading, and improve security by allowing users to retain control of their assets until the point at which trades are executed. DEXs typically use liquidity pools to support exchanges, which opens an investment avenue for crypto holders. While profitable trading can be made over DEX’s, anyone can also temporarily contribute pairs of crypto to DEX’s liquidity pools and earn interest from the fees incurred by its users.
Since it is used to support crypto payments rather than DEX conversions, one liquidity pool-based DeFi platform – Pelago – lets contributors deposit only a single asset type to the pool in return for interest. Providers receive ongoing interest in the form of whichever cryptocurrency they deposited and enjoy zero impermanent loss on their investment. Moreover, robust demand for payment processing helps to ensure stable returns for providers, as the interest on their investment comes from the usage fees for Pelago’s crypto payment protocol.
DeFi introduces novel concepts like token farming and staking, which enable users to earn rewards by locking up their assets in specific protocols or staking pools. Such mechanisms incentivize participation in DeFi and, as mentioned, bring liquidity into the ecosystem. While liquidity contributors can earn interest on their share of the pool, other yield farming opportunities are available to further grow their assets. For instance, liquidity staking derivatives such as liquidity provider tokens (LPTs) can themselves be deposited. Pelago’s payment system uses a liquidity pool where contributors receive LPTs that they can stake for Pelago tokens. Overall, yield farming and staking lets investors diversify their portfolios by allocating their assets and derivatives across various protocols, compounding their earnings.
DeFi also unlocks tokenized RWAs (real-world assets), where ownership in things like artwork and real estate can be verified on-chain. This process allows for the tokenization of RWAs so they can be bought and sold on Web3 exchanges. Essentially, this means that owning the token representing an asset is the same as owning that asset. This allows for easy, remote buying and selling of assets in RWA markets that have been considered relatively illiquid in the past (like artwork). By creating a secure online way of buying and selling real-world assets, tokenized RWAs open up new and exciting investment avenues that don’t rely on central intermediaries.
Tokenized RWA also enables fractionalized asset ownership, allowing investors to access a wider range of assets and diversify their holdings. Fractionalized RWAs can allow multiple investors to share ownership of – and thus the returns on – any given asset, improving accessibility to RWA markets and investing in general. Fractionalized NFTs of the more traditional variety are also a popular way to invest in high-value assets, letting holders share the ROI made from top collections. Overall, tokenization brings liquidity and tradability to traditionally illiquid assets, increasing investment opportunities for individuals.
DeFi unlocks a new world of investment types, transforming how we think about finance. Through decentralized finance, individuals can now explore previously inaccessible assets, participate in emerging markets, and diversify their investment portfolios like never before.
From decentralized lending and borrowing to staking and yield farming, DeFi has expanded investment options beyond traditional stocks and bonds and empowered individuals to engage directly in the global financial ecosystem by bypassing intermediaries. As DeFi continues to evolve, expect even more innovative investment types to develop. Now is an exciting time for investors who are willing to explore opportunities and adapt to the changing financial landscape.