Streetwise: DeFi, or decentralized finance, is a do-it-yourself crypto version of investment banking, with high rewards and huge risks
and the double- or triple-digit interest rates on offer are closer to the marketing style of Las Vegas than Wall Street. Don’t be fooled: PancakeSwap and its competitors in what’s now known as DeFi, or decentralized finance, are bringing casino capitalism to the crypto masses.
Market making, or yield farming, is among the most basic. Prime brokerage, the bank units that serve hedge funds, has reappeared as DeFi’s collateralized lending, allowing speculators to pile on leverage or short a token they want to bet against by borrowing and selling it. Interest-rate swaps and basis swaps are increasingly common as people use debt to arbitrage between exchanges, DeFi providers and different cryptocurrencies.
El Salvador became the first country in the world to adopt bitcoin as its national currency, allowing people to use a digital wallet to pay for everyday goods. Here’s what the impoverished nation’s risky experiment looks like. Photo: Marvin Recinos/Agence France-Presse/Getty Images It’s not only these two risks that matter, of course. The customer is on their own in navigating the other main dangers of DeFi: credit, liquidity and currency risks. These risks are played down or not even mentioned by DeFi platforms, leaving investors to rely on asking for advice on Reddit. Sometimes that advice is great, other times not so much.
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