Decentralised finance - What it is and what to look out for as an investor

by Carlos
3 Minuten
Decentralised finance - What it is and what to look out for as an investor

First of all, this blog post is about my personal experience. It is by no means a financial consultation and is only intended to shed light on one aspect of the financial world. As is true everywhere in life, you act at your own risk. This also applies to investments.

I recently came across the term DeFi. At first I thought of defibrillator, but it was the abbreviation for Decentralised Finance or in German "Dezentralisiertes Finanzwesen", also "Decentralised Finance".

But what is behind it, and how can investors benefit from this knowledge?

Decentralised finance refers to a financial system that is no longer a system in the broadest sense. The administration, production and distribution of money, for example, is no longer carried out by central banks and hierarchically graded by national banks and commercial banks. Rather, the system is without control. What sounds quite negative at first is actually a positive characteristic. For we all know markets that function in the same way and are little regulated. The market for automobiles is such an example. The price of cars is determined by supply and demand. Here, too, no authority regulates distribution and sales. Our neighbour Germany had an example of a planned and state-controlled automobile economy. The GDR took care of the production of the Trabant car. The distribution of the cars was also controlled by the state. The result: expensive cars, long waiting times, and that even though the models could not come close to holding a candle to their western counterparts.

Decentralised finance is already a reality today: Bitcoin and Co are structured according to this principle. The data on who owns how much Bitcoin is encoded in the blockchain. This cannot be manipulated or deleted because it is available in a decentralised manner.

Another feature of decentralised finance is that there is management and storage of the data, but it is decentralised. The participants in this market have the data stored on their technical devices. These are more and more smartphones, but desktop computers and servers are also possible.

From the point of view of a repressive state, it is also more difficult to ban such a currency and the payments associated with it if it cannot exercise control. Of course, it can also be misused for criminal actions. But as so often, the invention of decentralised finance is application-neutral. In this way, freedom troops in dictatorships can also be financed or disagreeable dissidents can maintain a minimum of liquidity.

By no means should cryptocurrencies be relied on alone. Rather, I see it as one of many pieces of the puzzle that complement a well-thought-out investment portfolio. Short-term investment can be tricky, as the prices of currencies are often subject to strong fluctuations. Long-term hedging, precisely in countries that have a weak monetary system of their own, can make sense.

I, for one, find the development quite exciting. And those who manage to curb their greed and see decentralised finance not as a speculative object, but as a long-term hedge or exciting technology, will also benefit from it.