The Future Of DEFI!
by Joshwa Fuchs
Last Updated: Dec 8th, 2021
Lets Start With What Is DEFI
So DEFI stands for "Decentralized Finance" which refers to a sector of the cryptocurrency industry that deals with financial applications (think banking services without the banks) that are independent of central financial intermediaries like banks, centralized exchanges, ect. Now instead it replaces all of these banks and exchanges with "Smart Contracts" which is a set program stored on a blockchain that runs on blockchains or a distributed ledger techonolgy when predetermined conditions are met.
Smart Contracts are used to automate the execution of a agreement so that all participants can be immediately certain of the outcome, without any intermediaries involvement or time loss. They can also automate specific functions and workflows triggering the next action when specified conditions are met. Think of it like "If/When/Then" type statements that are written into code on a blockchain like Ethereum where majority of the smart contracts are.
These actions could include releasing funds to appropriate parties, registering vehicles, sending nofications, or issuing a ticket or executing a will and testimant. The blockchain is then updated when the transaction is completed. That means the transaction cannot be changed or altered, and only the parties who have been granted permission can see the results.
OPFI also refer's to Open Finance which also can refer to (Dapps) which are decentralized applications themselves such as loans, asset trading, savings, insurance, lending ect that are more inclusive allowing anyone in the world access as long as they have a smartphone and internet.
Additionally all the smart contracts used to create defi employ open-source code, opening them to community auditing. And by eliminating intermediaries, DeFi users are able to maintain full control over their virtual wealth, as wel as directly interact with them via a Dapp.
Why the DeFi Space & What is Crypto Yield Farming?
Decentralized lending became very popular by the maker platform, one of the earliest DeFi projects to successfully launch. Crypto holders are now able to start borrowing, lending and creating liquidity pools by Crypto Yield Farming. Crypto Yield Farming is part of the DeFi ecosystem.
Yield farming is the process of lending cryptocurrency assets to DeFi protocols so that the assets, or "liquidity", can be utilized by others. In return for lending digital assets, users are rewarded with more cryptocurrency tokens. It is a way for cryptocurrency investors to earn passive income from digital assets that would otherwise be sitting idle.
The process is similar to staking as it involves depositing and locking cryptocurrency holdings for a certain period of time. However, while staking uses cryptocurrency tokens to power a blockchain or protocol, yield farming uses cryptocurrencies as liquidity for other investors or traders. Those that take part in yield farming and provide liquidity to DeFi platforms are known as liquidity providers (LPs). The liquidity is often used for decentralized exchanges, trading or loans. Think of Liquidity Pools as a pot of cryptocurrencies that others can use for exchanges or loans and you sit back and collect passive income or growth.
Yield is the annual retiren that a liquidity provider can receive for lending cryptocurrency assets. This is often written as a percentage, either as a annual percentage rate (APR) or annual percentage yield (APY). As the Automated Market Makers (AAM's) calculate interest rates using supply and demand, unlike traditional financial investments, yields can vary daily.
Many of the DeFi tokens are liquidity provider tokens where DeFi protocols mint liquidity tokens when a user deposits cryptocurrencies into a liquidity pool helping to drive up value on that liquidity token. For example if a user deposits AVAX into the borrowing and lending protocol compound, they would receive AVAX or PNG tokens in return depending on the liquidity pool. Joe is another growing popular DeFi Liquidity provider token on its own DEX (decentralized exchange) called traderjoexyz.com that allows you to invest your various paired tokens like CRA/AVAX or BNB/Joe, or BNB/AVAX or AVAX/mYAK.
Popular Yield Farming platforms include but are not limited to Compound, AAVE, Synthetixs, Uniswap, Curve Finance, Yearn Finance and MakerDAO to name a few. Avalanche, and traderjoe are also others you can use.
Please note Crypto Yield Farming can be quite hard to do. Some platforms make it fairly easy and others can be very quite complex which increases your risk. You must be very knowledgeble in this space to do Crypto Yield farming as its not as easy as one would think and you could end up being scammed or lose all your money by meessing up and investing in the wrong Crypto Yield Farm that tanks. There are many "RUG PULLERS" out there who create these Yield farms which are fly by night DeFi protocols entered and then swiftly exited decenteralized marketplaces such as Sushiswap and Uniswap after suffering a rug pull, pulling out everyones liquidity in that pool leaving you with nothing.
In a sense a DeFi rug pull is when a hacker or unscrupulous developer (usuall anonymous) drains the liquity pool and steals everyones funds. This has happened over and over in 2020 and in 2021 where many scam projects hastily copied code from other legitimate projects and duped investors with insanely high APY (annual percentage yield) and liquidity incentives then they get a few hundred thousand or even a million and they yank the rug out from people causing everyone to lose their money.
The differences between DeFi and traditional banking or conventional financial institutions are almost limitless due to the flexible protocols and user experience that people can have. Meaning you can have many various protocols under a single product.
Why and How Should I Use DeFi?
For starts they are decentralized which translates into non custodial which means that the user has full control of their funds which is the complete opposite of a bank. There are no intermediaries which means no excessive fees or costs and its all about peer to peer transactions removing the middle man. Dapps power the ecosystem using self executing code that envisages the outcome and resolution of activities on these platforms.
The protocols are easy and some 3rd party platforms are easy to just stake your coins and earn some interest on your coins. Its very fast and easy to setup. Defi applications not only make financial services accessible but also affordable.
One major example of using DeFi is borrowing against your crypto. As an example, big mining companies now can pledge their Bitcoin holdings as collateral to get funds to then buy more mining machines where their mining facility pays back the loan and allows them to get their original BTC back. Then they just rinse, wash and repeat the process thus never losing any of their BTC. Mined BTC is the best cleanest type of Bitcoin you can obtain. Many of these DeFi lenders will take that collateral into posession and trade, sell or use it somehow or way just like banks do with your deposits. Then when it comes time to get your BTC back, they will replace it.
However there is risk in this where the 3rd party platform lender might not have your BTC and might not be able to give you back your Bitcoin, that is why when you do it becareful and if its a large sum, make sure that the Bitcoin or crypto is "segragated". That means the 3rd party lender must hold onto your collateral as if its still yours and to not trade it, it can't be moved out of that custody wallet until your loan is paid back in full and they release it back to you. This is by FAR the best way to protect your crypto and not put it at risk by borrowing against it. Some do this for larger deals and many wont so pick and choose your 3rd party defi lender carefully. All the lenders we work with and help obtain up to 70% loan to value for our partners do offer segregated options, however their minimums are typically $1m or higher.
How to get started with DeFi
To get started with DeFi you will need to decide on what you want to do in the DeFi space such as lending, borrowing ect. You will also need some cryptocurrency holdings such as Ethereum or even a stable coin such as USDC.
Please note that most DeFi applications utilize Ethereum so you can't go wrong having Ethereum in your portfolio of digital assets. You will need to have the proper wallet that allows you to go between DeFi platforms such as Metamask which supports ERC20 (Ethereum) based tokens. From there its a matter of deciding what you want to do and executing it. For Yield Farming then you will need to go to the right sites to do that such as Sushiswap orTraderjoexyz.com. Or you can choose to LEND your coins and make a percentage off of your coins vs just letting them sit there. Now its vital to make sure you are working with a reputable platform due to the scams that are out there so just be careful.
Cheers to knowing just a tad bit more about DeFi and Yield Farming. Stay tuned for the next update!
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