Top 1 most popular
DeFi
31% of MoneyMade members invest in DeFi
DeFi Returns vs S&P
1.10%
Versus S&P
•
an hour ago
1.10%
Versus S&P
•
an hour ago
6m High
6m Low
DeFi
92.81
57.05
S&P 500
4,205.45
3,783.22
DeFi
S&P 500
Does not follow the stock market
Sources: DPI Pulse Index, SPX
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Highlights
Good For
Early adopter benefits and high growth potential
Time Horizon
2+ years
Diversification
Environmentally Friendly
Decentralized finance, or DeFi, is an umbrella term for blockchain-based financial services and products. The DeFi sector includes crypto and blockchain-based versions of traditional financial products like cryptocurrencies, crypto exchanges, crypto loans, crypto wallets, and even crypto savings accounts. DeFi transactions happen through a crypto wallet, such as Coinbase or MetaMask, and are stored on blockchain forever (or at least as far ahead into the future as we can fathom). This open-source nature is what makes DeFi so appealing to those calling for less governmental regulation and fewer fees. In theory, DeFi is a libertarian utopia, but in practice you have to be well-informed about both crypto and advanced trading to hang. If you’re willing and able to accept some risk, DeFi can be a fun and exciting way to earn passive income through advanced transactions like staking, lending, and trading.
Did you Know
Crypto entrepreneurs use DeFi for crowdfunding. When investors buy a new project’s utility token, it creates an instant liquidity pool of sorts. Early investors buy in at a low price, helping to fund the project, and then when the project reaches success, investors have a new asset to trade.
DeFi is revolutionizing lending. Traditionally, you need a credit score and sometimes collateral to secure a loan. DeFi opens up loan access to those who might not qualify for traditional loans but can use crypto assets as leverage.
Shark Tank’s Kevin O’Leary himself said that investing in Bitcoin and Ethereum isn’t enough to truly capitalize on the major upcoming crypto boom. Of O’Leary’s total crypto holdings, just about 5% are BTC and ETH, and the rest are a number of altcoins that collectively make the DeFi space possible. Most new blockchains have what are called native tokens, and investors can buy up these new tokens to create liquidity pools and trades—not to mention leverage your crypto assets for lending.
Coinbase, a popular crypto exchange, had over 73 million users and a quarterly trading volume of $327 billion in December 2021.
Considerations
Decentralized trading has lower fees
Stellar passive income potential
Early adopter benefits like DAO access and comparatively high potential ROIs
Reasons to Invest
Decentralized trading means fewer regulations, so it can be riskier
Lack of basic customer identity verification known as “KYC protocol” (know your customer)
High scam potential
Drawbacks
How You're Taxed
Income Tax
Capital Gains
DeFi trading can be a bit of a nightmare for tax reasons. It’s important to make a good faith effort and claim your profits and losses as accurately as you can.
Crypto is seen as a digital asset, so capital gains rules apply when buying and selling it. If crypto is held for over a year, most people pay 15% or 20%, based on your income threshold and filing status. Hold it for one year or less, and you’ll be taxed whatever your normal income tax rate is.
You can also keep a small amount of crypto on a centralized exchange like Coinbase without telling Uncle Sam (let’s be honest—he most likely knows), but once you exchange it for U.S. dollars or other cryptos where there may be a profit or loss from the exchange rate conversion, you should log those transactions for tax time.