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What is Decentralized Finance (DeFi) in Crypto?

DeFi is one of the most booming trends in the crypto world. And that can hardly be surprising. A digital Wall Street, but without office towers and all those suits looking to get their share from you. That sounds too good, almost like a fairy tale, doesn’t it? Well, actually, such a system does exist, and it’s name is DeFi. Today, we will look at what DeFi represents and where you can find it!

What is DeFi? How is it different from CeFi?

DeFi stands for “Decentralized Finance,” and CeFi, in its turn, stands for “Centralized Finance.” In order to understand how DeFi works, it is important to clarify how CeFi works first. Financial institutions such as banks, insurance companies, and stock markets are all part of the centralized financial system, meaning there is someone in charge, be that one person or a group of people. Someone that is in control and makes the decisions. And just like in any other human-related business, centralized financial institutions can have mismanagement or be corrupted.
Imagine if you wanted to go to the bank and get a loan: you’ll have to talk to the bank clerk first, then go through never-ending credit history checks, then you will have to patiently wait, sometimes days and even weeks, until you get a response. There are too many variables, too much pressure, and too much depends on the people you do not know, but who have all the authority. DeFi, or decentralized finance, offers an alternative solution with no central authority whatsoever.
Its goal is to create a fair and transparent peer-to-peer financial system where everyone is in control of their funds. To do that, it fully relies on DApps, or decentralized applications. They operate just like any other app, with one major difference: DApps are supported by a peer-to-peer network and based on a blockchain platform. There is no defined owner, and once the DApp and its rules have been created and deployed, they become immutable. That is why DeFi is seen as the next step in financial evolution after the invention of bitcoin, which happened 11 years ago.
However, since we are talking about decentralization, there are no financial regulations like the ones we see in centralized financial systems. Of course, there are a lot of reliable DApps and contracts, but finding them and trusting them with your funds and personal data is always a matter of risk and fully lies on your own shoulders. That doesn’t mean that there is something wrong with DeFi. It just takes some time before the system evolves into something with more protection and reliability.

It is worth noting that most of the DeFi DApps are built on Ethereum blockchain. Certainly, there are other platforms like EOS,TRON, Solana but Ethereum is a recognized leader — for instance, one of the most popular and usable DEXs Uniswap is built on Ethereum platform.

DeFi in the crypto space

Truth is, DeFi is already a major part of the crypto ecosystem. And while it’s clear that DeFi is a giant leap forward for the whole crypto world with already more than $98 billion locked in contracts, the current state of it is still far from being perfect. The ecosystem struggles with hacks and mishaps, rug pulls and scams of different sorts.
However, even now, there are dozens of reliable dApps that have already proved their worth, and more will inevitably be developed in the near future. Just a quick look at the current crypto space will make it clear that DeFi services can be found literally anywhere: wallets, staking, DEX (decentralized crypto exchanges) and so on. The list can go further.
DeFi can be found in literally any part of the crypto world, and it would be a challenge to cover all of them, so let’s take a look at some of the most well-known representatives.

Wallets:

Owning a non-custodial crypto wallet is almost a necessity for every crypto trader and investor. They provide a safe and secure way of storing your digital assets, and unlike crypto exchanges, which also provide a similar service, the owner is the one who holds the private keys. Most well-known and commonly used wallets like Trust Wallet or MetaMask are utilized in the DeFi space.

DEX

Unlike centralized exchanges like Binance or Coinbase, decentralized exchanges like Uniswap, PancakeSwap, or Sushiswap allow traders and investors to buy and sell digital assets without a third party. These DeFi trading apps rely solely on blockchain technology and smart contracts, thus allowing investors to trade with each other directly without the need for a middleman.

Liquidity mining, yield farming and staking

Liquidity mining refers to pairing cryptocurrencies (both tokens or coins) the trader holds, and storing them in the liquidity pool. That allows, for example, DExes to have enough liquidity and liquidity miners to receive a reward for their investments.
Yield farming refers to earning interest on cryptocurrency, just like earning interest on fiat money in savings accounts. With yield farming, it takes an investor to lock his or her digital assets for a period of time in order to earn interest or other cryptocurrency. This process looks similar to “traditional” loaning usually used by banks, but instead of fiat money, you use your cryptocurrencies.
Staking stands for supporting a blockchain network by committing a trader’s crypto assets. Staking can be utilized with cryptocurrencies that use the proof-of-stake method, like the upcoming ETH 2.0 upgrade for the Ethereum network, and it allows investors to earn passive income.

Benefits and downsides of Decentralized Finance  

Some of the benefits and downsides have already been touched on in this article, so let’s take a closer look at what DeFi can offer and what it still lacks, at least for now.

So let’s start with the positive aspects of the DeFi:

Anonymity: When using DeFi services like DEX or wallets, you do not need to provide your personal information like your ID, email address, or even your real name.

Flexibility: Since there are no third parties involved, you can have access to your digital assets anytime you want and do everything you want with them without having to ask permission from the financial institution.

Transparency: With DefI being decentralized, you do not need to ask someone in charge for information regarding transactions, you can simply check them on your own.

Simplicity: The dapps in the DeFi space are designed to give their users a friendly, intuitive, and smooth experience. Since the number of DeFi projects tends to grow, everyone can find something for their own taste and needs.

Discrimination-free: You will not be discriminated against or censored as a result of using the dapps.Corporations and governments tend to block people from using their services for one reason or another, but within the DeFi space, that simply does not happen.

Certainly, nothing is ever completely bright, and even such a promising technology like DeFi has its downsides. Let’s take a closer look at them:

Not 100% secure: Certainly, nothing is ever safe and secure, and even a heavily guarded bank can be robbed. With the DeFi space, you can bump into scam projects, hijacked accounts, or technical issues that some of the dapps might have due to bugged code. So the Tradingrule of DYOR (Do Your Own Research) should definitely be followed when dealing with the DeFi ecosystem.

Fees: Since most of the dapps are built on the Ethereum network, you may encounter very high transaction fees due to the network’s conjunctions. Certainly, that issue does not apply to every blockchain, and some of the networks have very low fees. However, the more popular the network, the higher the “gas” price you have to pay for using it.

No regulation: Since there are no financial authorities to regulate DeFi space, traders and investors should keep track of their own records for tax purposes. And since the rules and laws vary from one country to another, you need to know these laws before you start trading. 

Uncertainty: The DeFi system is still young and has a long way to go, unlike the traditional financial system that’s been out there for decades already. That leads to uncertainty and concerns from the potential investors who still have not yet entered the world of crypto. And less investors means less value will be locked in the DeFi system’s liquidity. 

DeFi is booming. Will regulations follow?

SEC and US Treasury see crypto as the main rival to the traditional banking system. SEC Chairman Gary Gensler believes that DeFi space must be regulated for the sake of “investor protection”. Yes, you must’ve already understood that conventional financial institutions see the rise of the DeFi sector as a threat to them. So the main question is not whether DeFi will be regulated or not, but when the first regulations will follow. Certainly, there are some shady spots not only in the DeFi but in the crypto world in general: for instance, money laundering has become a serious concern for law enforcement agencies. However, in case the regulations aim at the anonymity and flexibility of the DeFi ecosystem, the whole point of it may vanish, since its basic idea is about being autonomous and decentralised with no one in charge.
It is still unclear what these regulations may look like and what will be the way of implementing them into the DeFi system, but it is unlikely that traditional financial institutions will leave it as it is now. 

Is there a future for DeFi?

DeFi at the moment has quite a few causes for concern. But at the same time, if you are willing to risk it, the reward can be very nice.
DeFi has made the transactions more secure and flexible than those in the CeFi space.
It is more liberalised and does not discriminate against you based on your geographical position or accessibility. You cannot be turned away by a bank clerk here. Everyone has equal opportunities. Anyone from anywhere in the world can join the system and start making money without the necessity of sharing the cut with middlemen.
It is safe to say that the DeFi system is by far the biggest and most important milestone in the financial world since the invention of the first cryptocurrency, bitcoin. Yes, it is still new and needs a lot of improvements to minimise the risks and make the potential benefits more accessible. This will be the main challenge the DeFi system has to overcome in the near future.
In any case, the prospects look bright and we can expect DeFi’s and dApps’ impact on our business and financial activities to become more and more significant in the upcoming years.
Decentralized finance technology has managed to change the face of financial services. Now anyone who codes can build his or her own business or even a whole financial empire. The question is how the DeFi will evolve and when this will occur.will find out soon enough.

FAQ

How is DeFi different from CeFi?

DeFi stands for “Decentralized Finance,” and CeFi, in its turn, stands for “Centralized Finance.”

What are benefits of DeFi?

Anonymity, Flexibility, Transparency, Simplicity

 

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]]> https://tradingminecrypto.com/cryptocurrencies/what-is-decentralized-finance-defi-in-crypto/feed/ 0 Navigating Crypto Market Corrections: A Guide to Staying Afloat https://tradingminecrypto.com/cryptocurrencies/navigating-crypto-market-corrections-a-guide-to-staying-afloat/ https://tradingminecrypto.com/cryptocurrencies/navigating-crypto-market-corrections-a-guide-to-staying-afloat/#respond Fri, 17 Nov 2023 13:27:23 +0000 https://tradingminecrypto.com/?p=560

Navigating Crypto Market Corrections: A Guide to Staying Afloat

In the landscape of cryptocurrencies, market corrections are inevitable. These sudden downturns can be unnerving, but they are a natural part of the market cycle. Understanding what a market correction is and knowing how to respond when it happens is crucial for any crypto investor. In this article, we unravel the concept of market corrections in the crypto sphere and offer practical tips on how to weather the storm and seize opportunities during these challenging times. Whether you’re a seasoned trader or a beginner, buckle up as we explore the ins and outs of crypto market corrections and equip you with the knowledge to navigate through turbulent waters with confidence.

 

What Is a Market Correction in Crypto?

A market correction in crypto refers to a significant and temporary decline in the prices of various cryptocurrencies after a period of sustained growth. During a market correction, the market experiences a sharp reversal from an uptrend, leading to a decrease in asset prices. This correction can be caused by various factors, including speculative trading, market sentiment shifts, regulatory news, macroeconomic events, or simply a natural cooling off after a period of excessive optimism and price appreciation.

It’s essential to differentiate between a market correction and a bear market. A correction is a short-term phenomenon, typically lasting a few days to a few weeks, and is considered a healthy and necessary process in any market to stabilize prices after rapid gains. On the other hand, a bear market signifies a more prolonged period of declining prices and pessimism, often lasting several months or even years.

Market corrections offer both challenges and opportunities for investors. While they can be nerve-wracking, they also present a chance to buy cryptocurrencies at discounted prices before the market potentially resumes its upward trajectory. For this reason, having a solid risk management strategy and a long-term investment perspective is crucial for those involved in the crypto market.

Why does a market correction happen?

Market corrections happen for various reasons, and they are a natural and healthy part of any financial market, including the cryptocurrency market. Here are some common reasons why market corrections occur:

  1. Overvaluation: One of the primary reasons for a market correction is when asset prices become overinflated due to excessive speculation or irrational exuberance. When prices deviate significantly from their intrinsic value, a correction brings them back to more sustainable levels.
  2. Profit-taking: After a prolonged period of price appreciation, investors may decide to take profits by selling their holdings. This increased selling pressure can trigger a correction as the demand decreases.
  3. Fear and Uncertainty: Negative news or events, such as regulatory crackdowns, security breaches, or economic uncertainties, can lead to fear among investors, causing a sudden sell-off and resulting in a correction.
  4. Market Manipulation: In the relatively young and less regulated crypto market, market manipulation can play a role in triggering corrections. Large holders or groups may coordinate efforts to drive prices up and then sell off their holdings, causing a price decline.
  5. Trading Algorithms: Automated trading algorithms and bots are prevalent in the crypto market. When specific technical indicators or price levels are breached, these algorithms can trigger a cascade of selling or buying, intensifying market movements.
  6. Liquidity Squeeze: In times of volatility, liquidity can dry up as traders become hesitant to enter the market. This reduced liquidity can exacerbate price swings and lead to a correction.
  7. Sector Rotation: In the crypto market, different coins and tokens may go through phases of popularity and interest. When investors shift their focus and capital from one sector to another, it can cause corrections in specific assets.

It’s important to note that market corrections are a natural part of market cycles and are not necessarily a sign of a failing market. Instead, they provide an opportunity for the market to find a balance between supply and demand and allow for healthier, more sustainable growth in the long run.

How Long Does a Correction Last? 

The duration of a market correction can vary significantly depending on the specific market, the underlying factors driving the correction, and the overall market sentiment. There is no fixed timeframe for how long a correction will last, as market conditions are influenced by a complex interplay of factors.

In general, a market correction in the cryptocurrency market typically lasts for a few days to a few weeks. It is a short-term event aimed at readjusting prices after a period of rapid growth or overvaluation. During this time, prices may experience a moderate decline, often ranging from 10% to 20% from their recent highs.

However, it’s crucial to note that corrections can sometimes be more prolonged, especially in cases where the underlying issues are more significant or where there is increased uncertainty and fear in the market. In some instances, a correction can last for several weeks or even extend to a couple of months.

The term “correction” implies that the market is self-correcting and finding a new equilibrium. Once the market stabilizes and buyers re-enter the market, prices may start to rebound, signaling the end of the correction phase. However, it’s important to keep in mind that corrections are just one part of the larger market cycle, and they can be followed by periods of both consolidation and continued growth.

Market Correction vs. Bear Market: Differences 

Market corrections and bear markets are both periods of declining prices in financial markets, including the cryptocurrency market, but they differ in terms of duration, magnitude, and overall market sentiment. Here are the main differences between a market correction and a bear market:

  1. Duration:
  • Market Correction: A market correction is a short-term phenomenon, typically lasting a few days to a few weeks. It is a temporary pullback in prices after a period of sustained growth or overvaluation.
  • Bear Market: A bear market, on the other hand, is a more prolonged period of declining prices, lasting for several months or even years. It is characterized by a prolonged period of pessimism, negative sentiment, and an overall market downturn.
  1. Magnitude of Price Decline:
  • Market Correction: During a correction, prices usually decline by a moderate amount, often in the range of 10% to 20% from their recent highs.
  • Bear Market: In a bear market, prices experience a more significant decline, typically exceeding 20% from their recent highs. In some severe cases, assets can lose more than 50% or even 80% of their value during a bear market.
  1. Market Sentiment:
  • Market Correction: While market corrections may cause some unease among investors, they are generally seen as a healthy and necessary part of market cycles. Many investors view corrections as opportunities to buy assets at discounted prices.
  • Bear Market: Bear markets, on the other hand, are characterized by widespread fear, pessimism, and a lack of confidence in the market’s ability to recover. Investors may become more risk-averse, leading to further selling pressure and prolonged declines.
  1. Purpose:
  • Market Correction: Corrections serve as a natural way for the market to reset after periods of excessive optimism and price appreciation. They help to bring asset prices back to more sustainable levels and prevent bubbles from forming.
  • Bear Market: Bear markets are more indicative of deeper-rooted issues in the market, such as economic downturns, regulatory concerns, or structural weaknesses. They can significantly impact investor portfolios and may require more strategic adjustments to investment approaches.

 

Understanding the differences between these two phases is essential for investors to adjust their strategies and make informed decisions based on current market conditions.

Best trading strategies during Market Correction?

During a market correction, the following trading strategies can help you navigate the heightened volatility and potentially capitalize on opportunities:

  1. Buy the Dip: Look for assets that have strong fundamentals and have experienced significant price declines during the correction. Buying the dipat discounted prices can be a profitable strategy if you believe in the long-term potential of the asset.
  2. Dollar-Cost Averaging: Instead of investing a lump sum, consider using a dollar-cost averaging Invest a fixed amount at regular intervals during the correction. This strategy can help mitigate the impact of short-term price fluctuations.
  3. Focus on Quality: Concentrate on high-quality assets with strong use cases, active development teams, and solid community support. During corrections, weaker projects may suffer more, so focusing on quality can reduce risk.
  4. Employ Stop-Loss Orders: Implement stop-lossorders to protect your capital from significant downturns. Define the maximum loss you are willing to accept and set stop-loss orders accordingly.
  5. Avoid Emotional Decisions: Stick to your trading plan and avoid making impulsive decisions based on fear or greed. Emotional trading can lead to costly mistakes.
  6. Use Technical Analysis: Utilize technical indicatorsand chart patterns to identify potential entry and exit points. Look for signs of a potential trend reversal or support levels that may indicate a bounce-back.
  7. Watch Market Sentiment: Pay attention to market sentiment and sentiment indicators to gauge the overall mood of traders. Extreme fear or extreme optimism can signal potential turning points in the market.
  8. Stay Informed: Stay updated with the latest news and developments in the cryptocurrency space. News can have a significant impact on market sentiment and prices during a correction.
  9. Practice Risk Management: Limit the size of your trades and avoid overleveraging, especially during volatile periods. Always manage your risk to preserve your capital.
  10. Be Patient: Corrections can take time to play out fully. Be patient and avoid trying to time the market perfectly. Focus on long-term trends rather than short-term price movements.
  11. Monitor Volume: Pay attention to trading volume during a correction. Increasing volume during a price decline may indicate strong selling pressure, while decreasing volume could signal a potential price stabilization.

Remember that no trading strategy is foolproof, and the cryptocurrency market can be highly unpredictable. Be prepared for unexpected price movements and be willing to adapt your strategies based on market conditions. It’s essential to continually educate yourself, learn from your trading experiences, and be disciplined in your approach to trading during market corrections.

Final Thoughts

Navigating market corrections in the cryptocurrency space requires knowledge, discipline, and a long-term perspective. Prioritize risk management, stick to your trading plan, and avoid emotional decisions. Corrections are opportunities to buy assets at discounted prices, but be aware of the market’s high volatility. Continuous learning and adaptation are essential for success in the ever-changing crypto world. Finally, trade with money you can afford to lose and stay patient with your investments. Happy trading and investing!

FAQ

What is a market correction in crypto?

A market correction in crypto is a decline in the prices of various cryptocurrencies often in the range of 10% to 20% from their recent highs after a period of sustained growth.

How long does a market correction last?

There is no fixed timeframe, as market conditions are influenced by a complex interplay of factors. The duration can vary depending on the specific market, the underlying factors, and the overall market sentiment.

 

 

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