- According to the WSJ, apart from Dogecoin and NFTs, money is also flooding to DeFi
- DeFi is helping the cryptocurrency market to thrive
- It has also led to a surge in volatility
The Wall Street Journal (WSJ) recently published an article declaring that DeFi is a double-edged sword for the cryptocurrency market. By helping the cryptocurrency market thrive, it has also led to a surge in volatility.
Decentralized Finance or DeFi is a generic term for financial services offered on public blockchains. Similar to traditional banks, DeFi apps enable users to borrow, lend, earn interest, and trade assets and derivatives, among other things. The set of services is often used by people looking to borrow on their crypto holdings to make even more significant bets.
“It’s essentially banking for the blockchain space,” said co-founder and managing partner of one of the largest firms in the DeFi industry, Nexo Capital Inc., Antoni Trenchev.
On the other hand, there are also two key differences from conventional banks. All services are designed for digital currencies rather than government currencies such as the dollar and euro. Moreover, there is no intermediary or centralized system through which transactions are processed.
Users usually access DeFi platforms through software known as decentralized applications, most of which utilize the Ethereum network. They connect their digital wallet to the application and choose a service from the drop-down menu. The functions performed in a traditional bank by a loan officer or cashier are automated.
As a result, many traders have turned to derivatives and arbitrage strategies across various DeFi applications, hoping to increase their profits in the hot market. Leverage is a key factor in accelerating the sales of Bitcoin and other cryptocurrencies in the past month. As prices fall, many bullish positions are automatically liquidated, which puts even more downward pressure on prices and leads to a vicious cycle of further liquidation.