Financing a home purchase
Refinancing your existing loan
Finding the right lender
Additional Resources
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Compare Accounts
Use calculators
Get advice
Bank reviews
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Compare by category
Compare by credit needed
Compare by issuer
Get advice
Looking for the perfect credit card?
Narrow your search with CardMatch™
Personal Loans
Student Loans
Auto Loans
Loan calculators
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Best of
Brokerages and robo-advisors
Learn the basics
Additional resources
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Get the best rates
Lender reviews
Use calculators
Knowledge base
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Selling a home
Buying a home
Finding the right agent
Additional resources
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Compare car insurance rates
Homeowners insurance
Other insurance
Company reviews
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
Retirement plans & accounts
Learn the basics
Retirement calculators
Additional resources
Looking for a financial advisor?
Take our 3 minute quiz and match with an advisor today.
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication.
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for .
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money.
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.
Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.
Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.
DeFi — short for decentralized finance — is a new vision of banking and financial services that is based on peer-to-peer payments through blockchain technology. Via blockchain, DeFi allows “trust-less” banking, sidestepping traditional financial middlemen such as banks or brokers.
What’s in it for investors? DeFi promises to allow investors to “become the bank” by giving them opportunities to lend money peer-to-peer and earn higher yields than those available in traditional bank accounts. Investors can also send money quickly anywhere around the world, and they can access their funds via digital wallets without paying traditional banking fees.
Here’s how DeFi operates, how it can benefit individuals, how it challenges traditional banking and the risks it presents.
The goal of DeFi is to provide many of the financial services that customers and businesses currently enjoy — loans, interest on deposits, payments — but to use decentralized technology to do so. In effect, DeFi changes the industry not so much by changing the what but rather the how. That is, DeFi creates new infrastructure to deliver similar financial products and services.
To do so, it uses blockchain technology and smart contracts, among other tools. Blockchain is a kind of ledger technology that tracks all transactions on a given financial platform. Think of it as a running record of all transactions on that specific blockchain, chronologically recorded. If Person A pays money to Person B, that would be timestamped permanently in the ledger.
“The building blocks of DeFi are smart contracts, which are executable codes that can store cryptocurrencies and interact with the blockchain according to its rules,” says Oleksandr Lutskevych, CEO and founder of CEX.IO, a firm that facilitates DeFi and cryptocurrency.
To enable DeFi, smart contracts automatically execute transactions among participants. When the contract’s conditions are fulfilled, they self-execute their set of instructions.
“DeFi allows for smart contracts on the blockchain to take the place of trusted intermediaries — such as banks or brokerage firms — for peer-to-peer transactions,” says David Malka, CEO of YieldFarming.com, which helps investors earn income from cryptocurrency. “These peer-to-peer transactions in DeFi can include everything from payments, investments, lending and more.”
In this world, cryptocurrency becomes the de facto currency for transactions and records.
“DeFi is the natural continuation of the vision outlined in the Bitcoin white paper of creating electronic cash, so it is a very exciting time in the industry,” Malka says.
For individuals, the benefits of DeFi include potentially greater security, potentially lower costs, greater types of services and the ability to earn higher income through their crypto holdings. These benefits and others are enabled through decentralized apps created by various groups.
“Decentralized applications, or dApps, allow people to transfer capital anywhere in the world (with fast settlement and at a low cost), peer-to-peer borrowing and lending, crypto exchange services, NFTs, and more services like crypto wallet and storage solutions,” Lutskevych says.
“DApps are preprogrammed by developers and depending on their purpose they can execute transactions on a specific blockchain network, settle agreements between buyer and seller, or move assets from a decentralized exchange to a decentralized lending platform,” he says.
In short, the only limit is the ability to code an app that executes your instructions.
One currently popular benefit for cryptocurrency investors is the ability to generate income. Crypto staking, for example, allows owners of a coin to help support that coin’s ecosystem and earn income by helping to validate transactions. It’s part of what’s called yield farming. That’s proved attractive when interest rates at banks have been sitting at rock bottom for years.
“Anyone can provide crypto assets as liquidity or loans through what’s called yield farming that pays the depositor with interest and fees,” says YieldFarming.com’s Malka. “Yield farming is how you put your crypto to work in order to earn passive income.”
To provide their services, many dApps need liquid cryptocurrency available on the app. So they offer to pay income, a yield, in exchange for investors putting up their coins for some period. In effect, they provide an income for those who supply liquidity — similar to interest paid on deposits at traditional banks, but riskier (as discussed below).
Depending on the type of dApp, cryptocurrency owners can farm yield through various services such as:
So these methods of generating yield provide another source of profits for investors, though you’ll owe taxes on crypto profits just as you would traditional sources of income.
“Even the lowest-risk yield farms can easily return interest rates several times those of savings accounts at banks,” Malka says. “This is particularly important during bear markets — where the price of cryptocurrencies like Bitcoin or Ethereum are trending downwards.”
Though DeFi sounds like a brave new world for finance, DeFi does present various drawbacks and risks to would-be participants:
Those are a few of the biggest risks in DeFi and ones that investors thinking of participating need to understand before they fully commit.
One of the biggest claims of DeFi proponents is that this new financial technology will disrupt traditional banking. In the extreme case, they say DeFi would totally disintermediate — wipe out the middleman — in financial transactions, to be replaced by decentralized networks of peers.
But if DeFi is so powerful, why wouldn’t banks simply co-opt the technology and offer it?
“We are definitely seeing traditional financial institutions increasingly leverage blockchain and distributed ledger technology,” says Malka of YieldFarming.com. “You’ll see this really accelerate in the coming years as these traditional institutions all recognize the inherent security of being on the blockchain.”
Malka expects that banks will create various DeFi products “to stay competitive and relevant.”
“You can easily imagine a scenario where a traditional bank creates yield-farming opportunities for their clients to participate in,” he says.
But such a change would be easier on paper than in practice due to the regulatory burden, says CEX.IO’s Lutskevych, creating complications for traditional businesses that even want to do so.
“Integrating blockchain technology would require revision of many well-established processes while opening them up to additional risks,” he says. “More so, subject to regulation, these institutions would need approvals for these activities from regulators.”
Those who are looking to get started in DeFi, beyond the basics of cryptocurrency trading, should proceed carefully and be sure that they work with a reliable counterparty. Though the yields offered by DeFi are enticing, don’t let the potential return blind you to the other risks. A downdraft in cryptocurrency markets could quickly wipe out any small gains from yield farming, and outright scams or theft could wipe out your crypto wealth even faster.
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.
Bankrate, LLC NMLS ID# 1427381 | NMLS Consumer Access
BR Tech Services, Inc. NMLS ID #1743443 | NMLS Consumer Access
© 2023 Bankrate, LLC. A Red Ventures company. All Rights Reserved.
What Is DeFi? A Beginner's Guide To Decentralized Finance – Bankrate.com
