Saying Goodbye to Bank Intermediaries: Can DeFi Truly Become a New Wealth Opportunity for Ordinary People? What Risks Should We Consider?

TradingKey - Have you ever thought about how you could borrow money, trade, or even manage assets without banks acting as intermediaries? That’s the essence of decentralized finance (DeFi).

In simple terms, DeFi creates a financial ecosystem built on blockchain technology that allows ordinary individuals to engage directly in lending, trading, asset management, and more on the blockchain network—all without involving banks or brokerage firms.

For example, in the past, if you wanted to take out a loan from a bank, you had to submit numerous documents and wait for approval. Now, on the DeFi platform MakerDAO, all you need to do is collateralize your cryptocurrency (like Bitcoin), and an automated smart contract will instantly generate the stablecoin Dai for you. The entire process requires no human approval; it is entirely executed by code based on predefined rules.

The key component here is the smart contract itself—these encode the terms of financial agreements into code that resides on the blockchain.

In decentralized lending scenarios, if a borrower fails to repay their loan on time, the smart contract can automatically trigger predefined rules and liquidate collateralized assets to cover the debt. There’s no possibility of human intervention or delay from institutions. This technological approach enhances transparency and efficiency in financial services while enabling more people—especially those previously excluded by traditional banking barriers—to participate in the global financial system.

At its core, DeFi replaces institutions with technology to establish trust — there’s no need to put faith in any specific individual or company; instead, one can rely on open and transparent code along with blockchain networks.

This revolutionary financial model is quietly reshaping our understanding and approach to “money.”

Lending — Turning Crypto Assets into a Savings Account

In the world of DeFi lending, platforms like Compound function as 24/7 "smart banks."

You can deposit your cryptocurrency assets such as ETH or USDT, much like placing money into an interest-earning digital piggy bank. If you deposit 100 ETH, you will receive 100 cETH (equivalent to a deposit receipt), and over time, the amount of ETH that can be redeemed for cETH will increase due to accumulated interest.

If you need to borrow funds, there’s no need to seek bank approval; you can simply collateralize your assets to borrow other cryptocurrencies.

For instance, if you have BTC but want USDT, you can use BTC as collateral to borrow USDT. The interest rate is automatically adjusted by the platform's algorithms based on market demand—when everyone is rushing to borrow USDT, the rate goes up.

The entire process involves no human intervention and is entirely priced by code according to market activity.

Trading — Asset Exchange Without Intermediaries

Decentralized exchanges like Uniswap serve as automated global marketplaces that eliminate traditional intermediaries profiting from price spreads; instead, they utilize liquidity pools in place of manual quotes.

You simply deposit two types of tokens (for example, ETH and DAI) into the pool as liquidity for this trading pair—much like setting up a booth at a marketplace.

During transactions, prices are determined by the ratio of quantities of the two tokens in the pool: when an individual utilizes DAI to purchase ETH, the amount of DAI in the pool rises while the ETH decreases, leading to an automatic price adjustment for equilibrium; this causes prices to automatically adjust for balance.

As a liquidity provider, you earn a share of transaction fees from each trade—akin to earning rent from your booth—so active trading leads to greater profits.

Liquidity Mining — Earning Dual Rewards

Liquidity mining is often compared to "farming" in the DeFi landscape.

Taking Curve Finance as an example: when you deposit stablecoins like DAI and USDC into designated liquidity pools, it’s similar to planting seeds on a farm.

In addition to earning transaction fee shares (like rent), you'll also receive governance tokens called CRV (similar to farm points).

These CRV tokens are not merely digital rewards; holding them allows participation in platform governance—for instance, voting on whether new liquidity pools should be launched or adjusting fee rates—effectively making users shareholders.

Insurance

When investing in DeFi projects, one major concern is vulnerabilities in smart contracts or hacker attacks.

Nexus Mutual operates like an "insurance company" specifically serving the blockchain world.

If you've invested funds in a DeFi project but are worried about potential bugs causing losses of assets, you can purchase insurance coverage for a small fee.

If an agreed-upon event occurs—such as contract vulnerabilities or hacking—you’ll receive compensation according to policy terms—essentially insuring your digital assets against unexpected risks and enhancing peace of mind with your investments.

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Curious about how DeFi differs from traditional finance? Let’s compare them across several key dimensions.

Degree of Decentralization — Who Controls Your Transactions?

In traditional finance, transactions like transfers must go through a bank, while buying or selling stocks requires interaction with an exchange.

All operations are processed through these institutions’ systems, which handle both clearing and settlement and can also review or intervene in your transactions.

In contrast, DeFi emphasizes user autonomy. Based on blockchain technology, transactions occur directly on a peer-to-peer network without intermediation from banks or brokerage firms.

You can initiate transactions using a digital wallet, with smart contracts executing automatically.

For instance, swapping tokens on Uniswap involves entering the amount and clicking confirm—within minutes, the transaction is completed, giving you complete control over your assets with no institution able to interfere.

Transparency of Transaction Details — How Transparent Are Transactions?

In traditional finance, users often find it difficult to understand internal operations; they only see debits and credits on their bank statements without knowing how that money has moved within the bank or how risk assessment models are calculated—even whether institutions have allocated funds elsewhere.

In DeFi, all “ledgers” are open to scrutiny: every transaction record is permanently stored on the blockchain and can be accessed by anyone using a blockchain explorer.

Transaction Speed — How Long Does It Take for Transactions to Settle?

Traditional financial transactions can be slow; for example, cross-border remittances may take 2-5 days due to multiple institutional reviews and clearances.

Even stock trades executed on the same day require waiting until the next business day (T + 1) for confirmation—leaving you anxious if you need cash urgently.

In contrast, transactions in DeFi confirm much more quickly.

The Bitcoin blockchain averages about 10 minutes per transaction confirmation; meanwhile, Ethereum can confirm transactions within minutes when not congested—sometimes even achieving near-instantaneous settlements.

Transaction Costs — How Much Difference Is There in Fees?

Various fees in traditional finance often feel like hidden costs: for example, bank loans might incur not only interest but also various service charges or account management fees.

Trading stocks usually involves paying commissions to brokers while buying mutual funds may entail subscription fees along with management fees that accumulate significantly.

In DeFi, the primary costs consist of blockchain network miner fees (which fluctuate based on network congestion) and any platform service fees (if applicable).

For example, trading on Uniswap incurs a fixed fee of 0.3%, regardless of transaction size; this fee goes directly to liquidity providers without any cuts taken by institutions—making small transactions less financially burdensome.

Regulatory Environment — Is It Lenient or Strict?

Traditional financial systems worldwide operate under strict regulatory frameworks requiring banks to meet capital adequacy ratios and reserve requirements while publicly listed companies must regularly disclose their financial statements—with severe penalties for violations aimed at protecting investors and maintaining market stability.

Currently, there is no unified regulatory framework for DeFi globally; regulations differ significantly between countries.

Some nations encourage innovation while others outright prohibit it or adopt a cautiously observant stance. This flexible setting encourages innovation within DeFi but also brings along certain risks.

Who Can Participate? Are There High Barriers to Entry?

Traditional finance imposes multiple barriers based on geography, identity, and capital size—for instance requiring accredited investor certification for overseas investments.

In contrast, DeFi is open access: anyone with Internet connectivity and a digital wallet (even one created for free) can participate in lending activities like trading or mining across various platforms.

(Source: Shutterstock)

High Yield Potential

To encourage users to provide liquidity, DeFi has introduced a concept called “liquidity mining,” which essentially allows you to earn additional token rewards from the platform by depositing your coins into designated liquidity pools.

How crazy were early participants?

When the YAM project launched in 2020, some people reportedly earned 50% in a single day by staking their assets.

Although the project ultimately collapsed due to a code vulnerability, it demonstrated the rapid wealth creation potential inherent in DeFi.

Asset Flexibility

In traditional finance, you can only liquidate stocks by selling them, and mortgaging property often involves complex and lengthy processes—assets feel like frozen goods that need to thaw before use.

However, DeFi allows your crypto assets to act as “universal keys.”

For instance, if you have Bitcoin but don’t want to sell it while needing liquid funds, you can leverage it as collateral with MakerDAO to create the stablecoin Dai.

You can then use Dai to purchase other cryptocurrencies or invest while still holding onto your Bitcoin.

Moreover, through protocols like Synthetix, you can trade real-world assets such as gold and U.S. stocks on-chain without needing multiple accounts; one wallet allows for global asset allocation—transforming assets from “single holdings” into “flexible turnover.”

Technological Innovation Dividend — Positioning Yourself for the Next Explosive Sector

The world of DeFi is akin to an ever-evolving tech marathon where innovations appear each year.

For example, the DeFi derivatives market exploded in 2021, bringing substantial profits for early entrants.

Additionally, Layer 2 scaling solutions (like Optimism), which gained popularity over the last two years significantly increased transaction speeds and reduced fees.

As an investor willing to spend time researching project white papers and participating in testnets to experience new functionalities firsthand, you could identify breakout opportunities similar to those who discovered Amazon stock early on.

However, it's crucial to remember that in this rapidly changing space, patience and rationality are always more important than blindly following trends.

Smart Contract Vulnerabilities

DeFi relies heavily on smart contracts for automated execution; however, code is human-made—vulnerabilities can lead to significant issues. In 2020 YAM encountered a mathematical formula error within its contract: within three days of launch its token plummeted from 160 to 0.30—leaving countless investors with nothing.

In 2022 Wintermute fell victim due to poor key management when $200 million worth of assets were stolen—akin to having a bank vault broken into.

Thus don’t assume that “code is law” guarantees safety; always verify whether projects have been audited by organizations like Certik before participating.

(Source: Freepik)

Market Volatility and Impermanent Loss

Everyone has witnessed extreme price fluctuations in cryptocurrencies; it’s common for Bitcoin's value to increase by 10% or decrease by 20% within a single day—investing in DeFi necessitates managing these heart-pounding volatilities first and foremost.

Even more obscure is "impermanent loss": for example, if you've deposited both ETH and USDT into a liquidity pool—and one day ETH unexpectedly surges by 50% while USDT remains at $1—you may find that your total asset value within that pool is less than if you'd simply held ETH alone—resulting in what feels like missing out on gains.

Many newcomers fail to recognize these hidden losses; they think merely depositing coins guarantees profit but soon learn hard lessons from market movements.

Regulatory Uncertainty

Currently, DeFi exists within regulatory gray areas with varying attitudes across nations.

Therefore, consider carefully: if a project suddenly faces regulatory scrutiny or enforcement actions arise against it – can you withstand such shocks against your principal investment?