In basic terms, let’s start this Introduction to DeFi (decentralized finance), with its definition, as defined by one of the stalwart trusted online financial/investment space resources, investopedia.com:
What exacty is DeFi? – Decentralized Finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. It eliminated the fees that banks and other financial companies charge for using their services (i.e. loans, etc.). You hold your money in a secure digital wallet instead of keeping it in a bank.
Some of the key attractions of DeFi for many consumers are:
- It eliminates the fees that banks and other financial companies charge for using their services.
- You hold your money in a secure digital wallet instead of keeping it in a bank.
- Anyone with an internet connection can use it without needing approval.
- You can transfer funds in seconds and minutes.
Decentralized finance protocols enable lenders to earn high interest rates and are growing in adoption
The most straightforward way to earn money in the crypto world is to buy an asset at a lower price and sell it at a higher price. As simple as that may sound, statistics tell a different story. It is estimated that 95% of traders actually lose money. It is one of the major reasons why experts suggest that buying and holding your crypto assets for the long term will be a much safer and sound investment strategy. To those investors who are worried about their crypto assets sitting idle or looking for other methods to earn in the crypto world, decentralized finance (DeFi) is the answer. In this article, we are going to touch on the basics of DeFi and how one can participate in this burgeoning ecosystem.
Lend and Earn
DeFi simply refers to the financial products and services that are built on blockchain technology. In traditional finance (TradFi), there’s a central institution like a bank that offers lending, borrowing etc while in DeFi, protocols programmed by developers take care of these services.
Let’s take lending for example. By lending in the DeFi ecosystem, one can earn much higher annual interest rates (5% to 30%) compared to tradFi. Second, the process of accessing these services has been made easy as all one needs is a wallet (like metamask) to interact with. Third, the amount that is being lent is over collateralized. For example, if a borrower wishes to borrow $1,000 in Ethereum from you (the lender), he has to deposit a little more, like $1200, so that in case of a situation where the borrowed amount becomes less than what he has deposited, he gets liquidated. This makes sure you (the lender) receive the initial investment. Hence lenders get their money back with lower risks. Curve, Aave and Yearn are a few of the DeFi lending protocols to check out at the start.
A Riskier Approach – Liquidity
Liquidity is key to a functioning market. Financial markets create liquidity by bringing buyers and sellers together. In tradFi, an exchange usually provides all of token liquidity by themselves using an orderbook and people who trade pay transaction fees to the exchange. An orderbook is a list of buy and sell orders of an asset accompanied by a matching engine that helps these orders to be executed. With DeFi, the orderbook gets replaced by automated market makers (AMMs) with no human intervention.
Any investor with crypto assets can provide liquidity to these AMMs and collect a portion of fees from those who trade through AMMs. The returns will depend on the daily transaction fees (on SushiSwap, its 0.25% x daily transaction volume) and share of the pool. The downside is the risk of impermanence loss which occurs whenever there’s a change in the price of the crypto asset. Uniswap, Spookyswap and Pancakeswap are some places to begin if an investor wants to be a liquidity provider.
Or Just Explore For Airdrops
Airdrops are one of the most successful and tested strategies used by the blockchain networks to reach a wider audience. Airdrops are crypto rewards given to early participants of an ecosystem to nudge them to use the network more and spread the word to other potential investors. Some of the valuable airdrops in the past include Ethereum Naming System (ENS), Uniswap (UNI), Stellar (XLM), dYdX (DYDX) etc. All the early users of these ecosystems were rewarded handsomely ($1,000 on average in case of ENS) just for utilizing their products or services. In general, explorers of blockchains are always rewarded in some way via Airdrops.
The Future
DeFi adoption is just picking up and there are protocols that are emerging rapidly to solve various problems. The best way to get started is to get a crypto wallet like Metamask, transfer some crypto (such as Ethereum) from an exchange to the wallet and start playing around with DeFi products that have utility. By participating in the DeFi economy, investors will either receive rewards or invaluable learnings or both. In any case, it’s a win-win.
KEY TAKEAWAYS
- Decentralized finance, or DeFi, uses emerging technology to remove third parties in financial transactions.
- The components of DeFi are stablecoins, software, and hardware that enables the development of applications.
- The infrastructure for DeFi and its regulation are still under development and debate.
Disclaimer: The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion of a third party and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high-risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions. CelsiusCow.com does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is CelsiusCow.com an investment advisor. DYOR. Please note that CelsiusCow.com participates in affiliate marketing.
-Via this site: “DeFi for Beginners: Smart Ways to Invest in Crypto”
-Another great Intro to DeFi post: “Decentralized Finance (DeFi) Definition“
*Trending post: “Crypto Risk & Credit Analysis 2021-2022: How Yield is Earned via Cryptocurrency Lending“
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