A few years ago, all I thought about was getting rich with crypto: You ape all your money into an obscure meme coin (something named after a dog?) and then you wait for Elon Musk to tweet about it, and then he Price skyrockets the moon and we all come home rich.
This idea is not only fun (and very delusional), but most importantly unsustainable, especially if you want to build real wealth. This method often invites far more losses than people gain from it.
Cryptocurrency has changed and evolved a lot since its inception. From the birth of bitcoin, who radicalized finance by launching a digital currency that was free of governments or corporations ether which builds on Bitcoin’s technology to introduce programmable blockchains that developers can build on top of applications. As with most technological inventions, people build on the inventions of the predecessor, often creating something entirely new. Bitcoin enabled Ethereum to exist and now Ethereum enabled Ethereum to exist Decentralized Finance (DeFi)
This is an important point. Everything we will learn in DeFi is an innovation or an improvement over the old and limiting methods of traditional finance.
Decentralized Finance (DeFi) is an emerging form of finance that removes the middleman (banks, governments) from our day-to-day financial needs. What used to be banks and governments limiting our transactions are now peer-to-peer transactions made possible by innovations like blockchain and smart contracts enabled by lines of code without the human bias found in traditional middlemen, that improve the security, inclusivity and cost of transactions and our overall financial needs.
“DeFi takes the key elements of the work that banks, exchanges, and insurers do today — like lending, borrowing, and trading — and puts them in the hands of ordinary people.”
DeFi simplified.
As the title suggests, this is for dummies, so I’ll break it down into simple terms as to why you’re missing out on both Tech innovation DeFi begins & What juicy yields it has to offer.
To put it simply, these are the 3 things you will benefit from working with DeFi:
1. decentralization — Derived from its name, DeFi is decentralized, which simply means the absence of a central authority overseeing our financial being. The status quo of finance today is that it is riddled with banks, governments and several financial institutions that discourage and restrict their users from full financial inclusion.
With centralized finance, your money is held by companies where you don’t have full control over your funds, and the privacy of your personal information isn’t exactly a luxury you can afford with centralized exchanges, as they monitor every movement of your funds .
In DeFi protocols, they give you say in the direction of the platform Governance Token. Democracy matters in space, and if you actively involve investors in participating, you usually get a very passionate and engaged community base.
2. Including financing options and low fees — Contrary to popular belief, banks are not there to serve your interests. Private banks are ultimately a business looking to profit from you, and often that means they limit their services to only the super-rich. The average Joe cannot access the better services like loans and other investments. In DeFi, you only need a device (mobile or PC) and an internet connection to create a wallet online. From there, you can access pretty much all the services that the DeFi protocols offer compared to the myriad of KYC questions and requirements you have to deal with at traditional banks.
They often give you horrible interest rates that are only around 0.5% (and that’s on the generous side) that they offer to other customers for loans, say 4% interest so they pay the 3.5% for profit keep different. With DeFi the lowest rates you can get are 3% with up to 1000% with an added risk. Crypto used to be risky, but what enables it minimizes risk stablecoins(which I will discuss later). These are tokens directly tied to a fiat currency like the dollar. (1 USDT = 1 USD)
It doesn’t end there. Daily banking services are interspersed with transaction after transaction, and the more transactions you make, the more fees you have to pay. Even an account balance query of your credit is subject to a fee these days. With DeFi, fees are either very small or virtually non-existent.
3. Blockchain security — Defi is free from the clutches of central banks and other government agencies trying to control it. Blockchain technology is a decentralized public ledger (similar to your bank books that records your financial history) that records transactions in code. This method allows people anonymity and ownership of assets that are nearly impossible to alter. And since the ledger is public, anyone can check their transactions online just by looking at the public ledger.
Access to your online wallet is only possible with the keys (like your bank PIN). In DeFi, you alone have access to these keys. It guarantees you privacy but at the same time you are solely responsible for keeping your account safe from hackers and people who want to take some of your crypto balance.
A stack of 100 USD bills
Earning opportunities in DeFi
This is the part people usually skip to. Each method of earning comes with its own different level of risk. Here are the ways people are making money with DeFi.
1. Lending
Loan logs like Spirit are decentralized lending protocols that lend or borrow cryptocurrency without going to a central intermediary. Traditionally, banks charge a lot when it comes to loans. You must have liquidity for the bank’s principal each month, plus interest on top of a collateralised asset (e.g. a car would be collateral for a car loan). Rates are better on these DeFi protocols than traditional ones. Money is constantly flowing into the DeFi market.
2. Liquidity Pools
Liquidity pools allow you to earn interest on the fees people pay when using pools DEXs (Decentralized Exchanges). In traditional markets, trades are executed as soon as buyers and sellers match, but with DeFi liquidity pools you get a hassle-free investment that doesn’t require you to constantly keep your eyes on the market.
You earn from liquidity pools by investing your wealth in a pool of two coins where you earn a significant share depending on the pool APY (annual percentage return) each time someone uses this pool to exchange their tokens. Let’s say you place your assets in a pool of $ATOM & $ETH. Every time a trader uses this pool, they pay a fee that you would earn from. osmosis is a decentralized exchange that offers great APY for its liquidity pools of up to 1000%.
However, there is no free lunch as you would have to beware of a concept called impermanent loss. In the scenario where one of the tokens has skyrocketed in price relative to the other token in the pool, you would have benefited less by simply holding it. However, if you want to minimize risk, there is always an option to team up stablecoins or invest in two solid assets (stable, non-volatile coins).
stablecoins are assets tied to a real asset such as USD. So if you own $USDT For example, 1 of these tokens is worth exactly 1 USD. The beauty of pooling in a stablecoin pool is that you can avoid extreme volatility losses by investing in a pool where a token is paired with a stablecoin. So not only is your wealth relatively safe, but you are also earning great APYs every day.
3. Incentives like Airdrops!
Airdrops are free money. Yes, I just said that and that’s not far fetched from what they’re already doing in the real world.
In real companies, they often give out free products for the customers to try to demonstrate their qualities of the product. For example a vegan restaurant offering our 100% vegan cookies on the street. Airdrops in Crypto are like that, except they give you the money directly. Developers want the hype and marketing gleaned from these airdrops.
The creation of certain platforms comes with the launch of the governance token that comes with an excellent airdrop. Governance Token Give its users a say in how the platform evolves, giving away free money to users who directly interact and contribute to its ecosystem. People just make crazy amounts Mark out & contribute to Liquidity Pools.
All of DeFi’s benefits and gains stem from its characteristics of being a permissionless decentralized space. But that also means it is vulnerable to hackers, scammers, and smart contract failures.
1. Hackers and scammers
- Because DeFi is decentralized, the space is inviting hackers eyeing a crack in your defenses. Because of this you need to keep your keys in a safe place and if you can afford it you can buy a hardware ledger to be safe.
- Protocols and projects that promise to make you rich quick, only to suddenly disappear with your money invested in their tokens. The DeFi space demands of you DYOR(Do your own research) on new projects before investing in them. This includes reading their white paper, checking out their Twitter and other social media, and investigating their developers to see if it’s legit.
2. Smart contract failures
- Smart contracts are basically a set of code that automates the transactions to be executed. These are vital to the success of a project, and if there are problems with the developer’s code, it can potentially ruin the project later. Either investors would lose confidence in the project over time, or it could self-destruct due to cracks in its system
- Faulty systems could allow access for experienced hackers. Because of this, some projects create safeguards and are well audited to prevent these events from occurring.
Edmond is a passionate writer for video games, GameFi and Web3. He has worked for top GameFi companies and video game/crypto news websites.
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