Decetralized Finance. How to make money?
Greetings to you, my dear reader. Now you will learn what DeFi is, where it is used and most importantly, how to make money with it!
P.S. If you already have an idea of what DeFi is, or you want to know how to make money with it as soon as possible, you can get straight to the point!
What is DeFi?
DeFi is financial instruments in the form of services and applications created on blockchain. The main objective of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system with open-source protocols. That is, to give a large number of people access to decentralized lending and new investment platforms, as well as to allow them to receive passive income from cryptocurrency assets.
BTW, most DeFi apps are built on the Etherium blockchain.
What does DeFi consist of?
DeFi projects are primarily blockchains, distributed registries for recording transactions. Currently, most of DeFi's services operate on the Ethereum network because of its capabilities and popularity among developers. However, DeFi's activity is also growing in other blockchains.
Then there are digital assets, i.e. DeFi tokens, which represent value that can be sold or transferred on the blockchain network. Bitcoin and other cryptocurrencies were the first blockchain-based digital assets. Others have a range of functions beyond payments.
The next component is wallets: software user interfaces for managing assets stored in the blockchain. With a non-custodial wallet, the user has full control over their funds through private keys. In the case of custodial wallets, the private keys are managed by the service provider.
Another important block in the ecosystem is smart contracts. This is blockchain-based software code that executes, controls and documents relevant events and actions according to predefined conditions and rules.
The next step is stablecoins (digital assets whose value is tied to fiat currency, a basket of fiat currencies, or other assets with a stable value).
So what are the pros of DeFi?
+ Decentralization: DeFi tokens allow transactions between users using multiple computers of other participants.
+ Absence of human factor. Decentralized Finance (DeFi) works on the basis of smart contracts, which eliminates the human factor.
+ Transparency - the DeFi marketplace is based on source code. All information about transactions is always available to any user. Therefore, such applications will easily pass a fair audit.
+ Cross-border: Here you can use financial services without intermediaries. Loans are processed in a few clicks at home, without bureaucratic red tape and draconian interest rates.
There are a couple of downsides. They cannot compete with the pluses, but they are worth mentioning.
- Performance: Blockchains are inherently slower than their centralized counterparts, which leads to the creation of additional applications.
- High risk of user error: DeFi applications transfer responsibility from intermediaries to the user
Now you know a lot more about DeFi. Let's get to the most enjoyable part!
How to make money?$
An investor places liquidity (cryptocurrency) on a decentralized crypto exchange and receives a share of the commission from trading transactions. The commission is usually 0.25-0.3% and is divided between liquidity providers according to their share in the pool.
The more active the trading, the more commission income the protocol receives and the higher the yield, but in some pools it can be negative. The maximum value is 0.27% for 30 days, i.e. about 3.2% per annum. In smaller pools, you can earn more, but the risks are much higher.
An investor deposits some funds into the pool of the lending protocol, and this money is issued as loans. This service is popular primarily among traders who are not satisfied with the conditions offered by a centralized crypto exchange.
The borrower must post collateral in excess of 100% of the loan amount (sometimes 150% and even 200%); in case of non-payment of the debt, this collateral is automatically liquidated (sold), so the lender gets his money back anyway.
Yields depend on the currency of the loan and are constantly changing. The highest rates are usually for stablecoins - USDT, USDC and DAI (up to 15%).
The standard scheme is as follows: an investor buys a token and places it in the liquidity pool of some trading or lending protocol. And as confirmation of participation in the pool receives special LP-tokens, which are deposited (staked) on a special smart contract.
Immediately after launch, projects often pay out large farming bonuses, so that the nominal yield can reach 1000%. Gradually, the number of tokens distributed each week decreases, but the yield still remains at the level of 50-100%.
You need to remember that this profit is nominal, and the real return will depend on the price of the token.
How to start?
However, before giving your liquidity to other users, you need to get inside the ecosystem. The most popular "door" is the world's largest stablecoin in terms of capitalization - Tether (USDT).
The most reliable and at the same time simple way is to buy USDT from a bank card in a regulated crypto exchange. Registering with such an exchange is quite easy, and this process will not take you much time.
To participate in DeFi, you will also need MetaMask wallet, which is supported by all DeFi protocols. Next, you need to send the purchased USDT to MetaMask.
Then bind the wallet to the selected DeFi protocol. Usually the DeFi application itself offers to do this. After linking to the wallet, you can place funds on the protocol.
However, the complexity of DeFi lies not in the mechanism of placing funds and receiving income, but in the choice of quality projects. Therefore, be sure to keep in mind the risks and be in the right infopoles to avoid falling for an unsuccessful project!