While digital currencies are thriving, there is more to learn than just about tokens. This article will give you an introduction to two important concepts in the financial and digital area; DeFi and Market Cap.
What is DeFi?
DeFi is the short term for “decentralized finance”. DeFi is a bundle of financial services on public blockchains that use smart contracts. DeFi’ can help you with most of the things a bank does, without requiring paperwork or third parties.
DeFi is global, peer-to-peer, and open to all. Services DeFi includes stablecoin issuance, peer-to-peer payments, lending/borrowing, trading, insurance, and more. There is no form to fill out or account to open. DeFi offers very competitive returns compared to traditional financial markets and other crypto opportunities.
The DeFi industry is still very new and investing in it carries risks. Many crypto enthusiasts are convinced that this industry is the future of finance. But it will all depend on the improvement that it adds to our daily life and how cryptocurrency will evolve in the future.
DeFi and dApps
dApps are decentralized applications that are run on peer-to-peer networks like blockchain, Tor networks, or distributed ledger technologies (DLT). There is no central authority that observes or approves the functions of these applications. dApps necessitate minor human interference. Therefore they integrate smart contracts for their business systems. Smart contracts are able to operate a vast range of tasks from purchaser consent to making payments.
PROS
- Decentralized
Most of the projects are managed with smart contracts.
- Open-source
Since the coding is public, anyone can inspect it and verify its functionality.
- Interoperable
People are able to use tokens, digital wallets, and exchange platforms together through the multifunctional nature of DeFi applications.
- Permissionless
Anybody can develop an application and launch it worldwide. Also, everyone can use it without the need for approval.
- Global
All you need for participating in DeFi platforms is an internet connection, and you’ll be able to access a vast range of services.
CONS
- Unstable
If the blockchain that DeFi is running on has some kind of instability, the same will happen to the DeFi application.
- Complexity
If fixing a bug or an update comes up, every user of the dApp has to update their copies and the network, making it very complicated.
- Trust
Even though not having a third party to intervene, sometimes a third party is needed and trust becomes an issue in DeFi dApps.
- Low liquidity
Even though a big amount of money is locked into DeFi, it is still a very little quantity when compared to the traditional financial system. Since 2017, the value locked up in these types of contracts has gone from millions to billions of dollars. This has brought a major rise in the market caps of the digital coins that are utilized for DeFi contracts.
What is Market Cap?
Market Capitalization, commonly referred to as Market Cap, is a fast and simple method for estimating a company’s value. It is the total dollar value of all the shares of a company’s stock.
It is calculated by multiplying the total number of a company’s shares by the current market price of one share.
When it comes to cryptocurrency, the price is just one of the ways to measure its value. Investors base their decisions on market capitalization because it can indicate the growth potential a token has.
If people are given the possibility to compare cryptocurrencies based on their market cap, they can make better investment decisions.
Cryptocurrencies are usually classified into three categories by their Market cap:
Large-cap cryptocurrencies
Have a market cap bigger than $10 billion. They have higher liquidity and a record of growth that make the investment safer.
Mid-cap cryptocurrencies
Have market caps going from $1 billion to $10 billion. They are considered to have more unexploited potential but are at higher risk.
Small-cap cryptocurrencies
Have market caps of less than $1 billion. These are more affected by market swings.
Decentralized finance offers a promising future. Analysts believe that DeFi dApps can provide, for the first time in history, access to financial services for the 40% of unbanked people around the world.
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