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.
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.
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.
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.
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.
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Disclaimer: This article was authored by Giottus Cryptocurrency Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.