Is DeFi Lending and Borrowing Right for You?
In the last year or so the hot topic in the blockchain arena has been Decentralized Finance (DeFi), the online banking system based on smart contracts that allows you to rapidly and efficiently borrow lend, exchange trade or store digital assets. There are pros and cons to DeFi, when compared with more traditional, Centralized Finance (CeFi) services, yet, DeFi tokens are becoming so popular that in some cases, they are even out-performing Bitcoin. One of the top performing tokens, COMP, belongs to the Compound Finance app. In fact, the Compound Finance token rose 233% in its first week of trading. However a Compound crypto review will show that Compound crypto services and their close DeFi competitors may be a dangerous choice for the unwary investor.
A thorough examination of how DeFi works and an in-depth review of its advantages and disadvantages will go a long way to clarifying whether DeFi lending and borrowing is right for you.
How is DeFi changing the way we manage our money?
DeFi is the next evolutionary step in online banking due to its versatility, transparency and inclusiveness. As a blockchain, permissionless system your financial counterparts are other users and you interact using automated processes. So, there are no middlemen to cost you time and money. DeFi apps, known as dapps can learn and adapt, seamlessly integrating new features, and creating lucrative yield farming opportunities. They are interoperable offering flexibility, speed and efficiency. The most common usage is for credit and lending services and here is where many users are delighted to discover that there are no Know Your Customer (KYC) or Anti-money Laundering (AML) obligations, meaning there are no identification requirements, no bureaucracy and no credit checks. This creates an open-door policy that offers accessibility to banking to many people who previously were unable to use such services. All it requires is an internet connection. The entire process is fast, using automated smart contracts that allow for near-instant interest payment. Users can access the market at any time from any location and as a non-custodial ecosystem, DeFi offers you total control over your capital.
Let’s clarify with an example. Compound finance one of the names in DeFi and any unbiased Compound crypto review must begin with an acknowledgment of the growing popularity of the platform. The Compound crypto lending and borrowing dapp is driving a lot of the hype in DeFi, with its promise of low fees and rapid, high yields. However, whether it can deliver over the long-term is still very much in question.
Compound crypto services enable lenders to offer liquidity in return for interest reaching up to 12% a year. Money deposited as collateral can also be used to borrow funds and there are no limits on borrowing or lending. When it comes to Compound crypto lending, you don’t loan money directly to another user. Rather, you are adding your assets to the Compound crypto “liquidity pool”, from which borrowers can take a loan. Since users earn tokens for their activity on the platform, the value of the native COMP, and the Compound crypto price prediction is a major factor in determining your profit potential.
While the DeFi arena is rapidly gaining in popularity with growing volume and interest, at this early stage, DeFi is still nowhere near able to match the liquidity of traditional, legacy finance. Whether it ever will, depends very much on whether the serious drawbacks in terms of security and risk mitigation can be addressed effectively enabling DeFi to take its place at the center of our global financial ecosystem.
The dark side of DeFi
The dangers of DeFi and companies like Compound cannot be underestimated. Firstly, the major issue with DeFi is security. While a bank can be hacked, leading to a loss of private financial data, you still have the fallback of being able to intervene when necessary. In contrast, with DeFi applications, there are only automated smart contracts and there is no one there to freeze account activity, cancel or reverse a transaction.
The volatility of the digital markets must also be taken into account. Cryptocurrencies are vulnerable to price swings and these fuel all DeFi protocols. The economics may also not be scalable for larger volumes of transactions, and with no human oversight, a glitch in the system could lead to a loss of all of a user’s funds.
Unfortunately DeFi protocols have some severe security flaws and the smart contracts have gaping holes that can be exploited. In fact since the start of 2020 alone, there have been at least five major system attacks such as the recent Balancer hack, which led to a loss of several millions US dollars.
We noted earlier that with the absence of KYC/AML, dapp users benefit from unparalleled accessibility and privacy. However Compound crypto services and others, in stripping out the bureaucracy, are allowing funds from illicit sources to circulate through the various platforms, with no means of preventing criminal or terrorist operations from laundering money or performing other fraudulent activity.
When borrowing or lending with a DeFi application there is also the risk of holding assets in a standard crypto wallet. Whether you use Compound crypto services or another app, the simple loss of a private key, a typo in an address or lost password can mean your money is gone forever. The statistics are concerning, with the Wall Street Journal estimating that one fifth of all Bitcoin is currently inaccessible.
Another important factor to consider is that regulation is still catching up with technology. The DeFi space is frequently compared to the Wild West, due to the lack of legal infrastructure and oversight. Those who place their capital in the hands of DeFi applications do not have the regulatory protections to shield them against fraud or negligent security. In addition, while various governments around the world are taking their first steps towards regulating DeFi transactions and classifying the applications, businesses will be hesitant to come on board while the tax implications are unclear and individuals will need to be careful to ensure they don’t get an unpleasant surprise from their local tax authority.
At Compound Finance liquidation is a real and present danger, as it is with a number of dapps. If the value of the coin that you have offered as collateral on a loan drops to below a certain threshold then your account could be liquidated completely meaning that you end up losing all of your capital.
Is DeFi the future of online finance?
Here at ArbiSmart, we believe that the future of online finance lies in combining the best of DeFi and CeFi to ensure a rapid, transparent and secure high yield investment channel.
For our investment platform, the way we do business involves providing the best of both worlds. Our blockchain-based automated crypto arbitrage system executes transactions on your behalf at lightning speed, with total transparency. At the same time however, we are fully EU licensed. This means we implement KYC/ AML procedures to guard against fraud and safeguard the integrity of client accounts. As a regulated company we are also audited externally, and have an insurance fund to cover all operational capital so that even if a hack were ever to occur, your savings would not be lost.
In addition, although our system is fully automated providing a passive income with no effort on your part, we also offer multiple support channels so that you have direct access to personal assistance the minute you need it and help accessing your account if required. We also have a human risk management team to provide market tracking and system monitoring around the clock and intervene in extreme circumstances.
Moreover, we offer returns far, far higher than Compound or other such crypto investing services. At ArbiSmart, you can earn anywhere from 10.8% to 45% a year and already start withdrawing profits within 24 hours or you can reinvest it to earn compound crypto interest.
So too, with the ArbiSmart interest-bearing wallet, you can provide liquidity in return for profits of up to 45%, depending on the account currency, whether your account is locked and the time frame for the closure.
You can earn further returns if your funds are converted into our native currency, RBIS. In just 18 months it has already risen 120% and based on the increasing liquidity and continuing global growth of the company, it is projected to go up by 3,000% by the end of 2021.
At ArbiSmart we are just one example of how financial platforms are evolving to create a new and better way forward. Both CeFi and DeFi have their own unique flaws and benefits. The scalability, liquidity and security of traditional, legacy finance combine perfectly with the speed, accessibility and sky-high returns of decentralized systems. As the two become increasingly interoperable we will see a more efficient, safe and democratic financial future.