Bitcoin revolutionized the monetary system. Now 2020 brings that to the rest of the financial system in a concept known as Defi (decentralized finance).
How Defi Revolutionizes... Everything
Think of all the functions financial systems provide. From the simple interest-bearing savings accounts, to complex systems:
- currency exchanges
- lending and borrowing money
- trading on margin
- prediction markets
- even insurance
These are huge industries with a middleman, intermediaries, and lots of red tape. Lots of money is spent on intermediaries like lawyers and banks to keep people honest and the money in these systems running smoothly. Defi cuts all that out.
What’s left are self-governing, decentralized systems. You don’t need to ask for permission to participate. You don‘t need to trust that the other party won’t rip you off. Money goes in, it flows, and it leaves. All that in an automated, and practically magical manner. This is beyond just a theoretical whitepaper. All these services are running and available right now.
How’s It Work?
What Bitcoin brought to the table with the invention of the blockchain was a peer to peer, append-only database. Ethereum 1 ups that with smart contracts. Take Bitcoin‘s blockchain concept and now you’ve got peer to peer, tamper proof software.
All of a sudden, we can bring together people with money and people looking to borrow money. The borrowers can put up collateral and the sellers can loan out their money with peace of mind. The software ensures the lender sends the money, and it ensures the collateral is retrieved from the borrower if they slack on the debt or interest.
How Can You Profit?
Smart contracts have matured a lot the past year with Ethereum being the front running platform. Right now, interest bearing platforms are gaining popularity. Just like a bank account, you can earn interest with the cryptocurrency you already own by letting it sit in these types of platforms. Unlike a bank account, you can get incredible interest rates. The tradeoff is that your money isn‘t FDIC insured, of course. However, the risk is quite small for the rewards offered. Especially when paired with insurance from smart contract failure.
Getting Started with Yield Farming
Most likely we will dive deeper into this topic later, as yield farming is truly a big enough topic to warrant it’s own post. For now, this will be just an overview.
You can purchase Ethereum at CardxCoin if you prefer, or you can buy Ether directly from your Metamask wallet by pressing the buy button and following the instructions. This will allow you to interact with the broader Web3/Blockchain ecosystem. Make sure you‘re investing a few hundred dollars worth, at the very least. Gas prices on the Ethereum network have been awful recently but they are flat fees. Make sure you invest enough money to make it worthwhile.
That is really all you really need to get started, although certain Ethereum tokens will fetch you higher interest rates than others. In case you want to swap for another token, like DAI, use Uniswap. Just keep in mind how much you’ll pay in fees to swap. Also, make sure you don’t swap ALL your Ether. You’ll need some to pay gas fees to deposit your stash in the platform of your choice.
There are a lot of interest yielding platforms available to choose from. Here are the ones we recommend:
Check the interest rates for these platforms here
As you can imagine, more risk comes with greater rewards. If you do choose one of the higher risk platforms we’d suggest getting insurance for it with Nexus Mutual. This only covers smart contract failure only however, which should be enough if you are just lending cryptocurrency.
Creative individuals might notice this trick. You can lend money on these platforms, earning interest. Then you can then use what you’ve deposited as collateral to borrow cryptocurrency, while still earning interest. With this borrowed money, you can then lend it out again somewhere with high interest rates. This effectively multiplies the money you have and increases the amount of interest you earn.
Be careful of borrowing money on these platforms. You’ll likely be fine as long as you keep track of the health of your loan, but the risk of liquidation exists if the amount of collateral you get drops too low (the interest you pay on the loan will detract from your collateral). There are huge fluctuations in the interest rates and there are huge fluctuations in the price of the base cryptocurrencies that can all risk your collateral if they happen to swing in the negative direction. Further, the insurance doesn’t cover liquidations due to flash crashes in cryptocurrency prices or anything else that is not specifically a bug in smart contract code.
I hope you’ve enjoyed learning about this topic as much as I enjoyed writing it 🙂
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