If you’re starting to dabble in crypto you’ve probably heard of DeFi and most likely asking “What is DeFi?” DeFi stands for Decentralized Finance. The decentralized aspect comes from blockchain technology and the ability to create permission-less contracts that no one person can alter. DeFi has many tools that are similar to a bank. There is the ability to deposit your money, much like a savings account, and then you earn interest by others taking out loans with your money. When they repay back that loan you earn the interest from them borrowing.
What is a Benefit of DeFi?
Decentralized Finance gives the user direct access to the benefits of Traditional Finance. You’ve cut out the middleman and the interest rates reflect that. Currently with a bank account you practically have a 0% interest on your savings. With DeFi it is very common to have at a minimum 6% APY (Annual Percentage Yield) on stablecoins. Anchor Protocol on the Terra Blockchain has currently secured funding to offer 20% APY on your stablecoins till the end of 2022.
What Types of Platforms are There?
There are many lending platforms out there such as one of the first, Aave. When you lend a single asset you for the most part earn a low but stable APY. You can also provide liquidity between two different coins/tokens that allows people to swap between those coins/tokens. When you provide liquidity it is common to earn a fee each time someone swaps using the pair that you provide. Some of these liquidity pairs can earn some fairly aggressive APY, but you are taking on more risk generally the higher the APY is. DeFi has even brought about a whole other ecosystem called GameFi which has produced “Play-to-Earn” games.
Why is it World Changing?
Sometimes understanding DeFi is a bit harder if you’re from a first world country. You might be thinking why would someone opt for DeFi instead of using Traditional Finance such as banks. Many countries around the world don’t have easy access to a bank. DeFi gives the chance for the people within in those countries to start earning savings and grow their net worth. It also allows people to get their money out of their countries native fiat. There are countries around the world that rapidly inflate their currency, or even completely collapse, that makes it impossible to pass down any amount of wealth you created through your family. With DeFi it gives them a path to be able to retain and even possibly grow that generational wealth for the first time.
Risks of DeFi
The downside to Decentralized Finance is that it is still a bit new. Because of that there is still chances that contracts could have exploits. There have been cases where a hacker has been able to exploit a contract and withdraw portions or the majority of funds that a contract holds. Because of this you need to assess what your own risk tolerance is. Like all financial plays, diversity is key.
How to get started in DeFi?
The first step would be to custody your own crypto. We have a Podcast that we discuss the importance of being in charge of your own crypto. We also discuss type of wallets that you can use.
Depending on what blockchain you are interested in being on, the steps to get your money there can either be extremely easy, such as Solana where you just need to withdraw it to your Phantom Wallet and now you’re ready to participate in DeFi. On the other hand there are more difficult routes such as Polygon, where we’ve given an example as to our favorite way to minimize the cost of getting money on to Polygon.
Need Help Getting Started on DeFi?
If you’re new to the DeFi space; things like this can be intimidating. If you want someone to walk you through this or just to have someone verify what you’re doing is correct, there is tons of people in the Palisade Crypto Discord that are able and willing to help guide you this and many other issues. Jump on in and introduce yourself, we would love to help you.