DeFi For Dummies – A Guide To Decentralized Finance

A few years ago I thought there was a way to get rich in cryptocurrencies – put all your money in an obscure coin (named after a dog?) and wait for Elon Musk to tweet at about it, after which the price skyrockets and we all come home rich.

Not only is this idea funny (and delusional), but it’s also unsustainable, especially if you want to build real wealth. This method often results in far more losses than gains.

Cryptocurrencies have changed and evolved a lot since their inception. From the birth of Bitcoin, which radically changed finance by introducing a free digital currency from governments or corporations, to Ethereum, which built on Bitcoin’s technology and introduced programmable blockchains that in-app developers can to become. As with most technological inventions, people build on the inventions of their predecessors, often creating something entirely new. Bitcoin allowed Ethereum to exist and Ethereum now allows decentralized finance (DeFi) to exist.

This is an important point. Everything we will learn in DeFi is an innovation or improvement over the old and limiting methods of traditional finance.

Decentralized finance (DeFi) is a new form of finance that removes intermediaries (banks, governments) from our daily financial needs. Thanks to innovations such as blockchain and smart contracts, transactions that were once restricted by banks and governments are now made possible through peer-to-peer transactions, without the human bias found in traditional intermediaries. increasing security, improved access, transaction costs and our overall financial needs.

“DeFi takes the key elements of the work that banks, exchanges and insurance companies do today – like lending, borrowing and trading – and puts them in the hands of ordinary people.”

Simplified DeFi

As the title suggests, this is an article for dummies, so I’ll explain in simple terms why you’re missing out on the technical innovation DeFi powers and what juicy returns it has to offer.

To put it simply, here are the 3 things you will benefit from when engaging in DeFi:

1. Decentralization

As the name suggests, DeFi is decentralized, which in simple terms means that there is no central authority overseeing our financial life. The status quo of finance today is that it is riddled with banks, governments and various financial institutions that prevent their users from full financial inclusion.

With centralized finance, your money is held by companies over which you don’t have full control over your money, and privacy of your personal information isn’t exactly a luxury you can enjoy in centralized exchanges, because they monitor every movement of your money. .

With DeFi protocols, you can use governance tokens to help determine the direction of the platform. Democracy is important in this space, and if you actively involve investors, you usually get a very passionate and engaged community.

2. Financing Options and Low Fees

Contrary to popular belief, banks are not necessarily there to serve your interests. Private banks are ultimately a business designed to take advantage of you, which often means they limit their services to the super-rich. The average person cannot benefit from the best services like loans and other investments. With DeFi, all you need is a device (mobile or PC) and an internet connection to create an online wallet. From there, you’ll have access to virtually every service offered by DeFi protocols, unlike the myriad of KYC questions and requirements you face at traditional banks.

Often they give you horrible interest rates which are only about 0.5% (and that’s pretty generous) that they offer to other customers for loans say 4% interest, from so they keep the 3.5% differently for profit. In DeFi, the lowest interest rates you can get are 3% with up to 1000% with added risk. Cryptocurrencies used to be risky, but that risk has been mitigated by stablecoins (which I’ll talk about in more detail later). These are tokens directly pegged to a fiat currency like the dollar (1 USDT = 1 USD).

But that’s not all. Everyday banking is riddled with transaction after transaction, and the more transactions you make, the more fees you have to pay. Even querying your credit is subject to fees these days. With DeFi, fees are either very low or virtually non-existent.

3. Security via blockchain

Defi is free from the clutches of central banks and other government agencies that attempt to control it. Blockchain technology is a decentralized public ledger (similar to your passbook that records your finances) that records transactions in code. This method allows for the anonymity of people and the ownership of assets that are almost impossible to change. And since the ledger is public, anyone can check their transactions online simply by looking at the public ledger.

Access to your online wallet is only possible with keys (such as your bank’s PIN code). With DeFi, only you have access to these keys. This guarantees you privacy, but at the same time, you are solely responsible for protecting your account from hackers and people who want to steal some of your cryptocurrency.

How to make money with DeFi

This is the part most people skip. Each opportunity for gain comes with a different risk. Here are the ways to make money with DeFi.

1. Ready

Lending protocols like Aave are decentralized lending protocols that lend or borrow cryptocurrency without involving a central intermediary. Traditionally, banks charge a lot when it comes to loans. You must have cash each month to transfer the loan amount to the bank, plus interest and a secured asset (for example, a car as collateral for a car loan). Interest rates are better on these DeFi protocols than on traditional ones. Money is constantly flowing into the DeFi market.

2. Liquidity pools

Liquidity pools allow you to earn from the fees people pay when they use pools on DEXs (decentralized exchanges). In traditional markets, trades are executed as soon as buyers and sellers meet. However, with DeFi liquidity pools, you have a hassle-free investment that doesn’t require you to keep a constant eye on the market.

You earn liquidity pools by investing your wealth in a two-coin pool and earning a significant share of the pool’s APY (annual percentage return) each time someone uses that pool to trade their tokens. Let’s say you invest your wealth in a pool of $ATOM & $ETH. Each time a trader uses this pool, they pay a fee that you would earn. Osmosis is a decentralized exchange that offers high returns of up to 1000% for its liquidity pools.

However, there is no free lunch because one must be wary of the concept of impermanent loss. If the price of a token skyrocketed relative to the other tokens in the pool, you would have profited less by simply holding it. If you still want to minimize risk, you can merge into stablecoins or invest in two solid assets (stable and non-volatile coins).

Stablecoins are assets tied to a real-world asset like USD. So if you own $USDT for example, 1 token is worth exactly 1 USD. The beauty of a stablecoin pool is that you can avoid extreme losses by investing in a pool where a token is paired with a stablecoin. Not only is your wealth relatively safe, but you also earn great APYs every day.

3. Incentives like Airdrops!

Airdrops are free money. Yeah, I just said that and it’s not far off from what they are already doing in the real world.

Real companies often have free products that customers can try out to show off the product’s qualities. For example, a vegan restaurant distributes our 100% vegan cookies on the street. Crypto-economy airdrops are exactly like that, only they give you the money directly. Developers want the hype and marketing that comes from these airdrops.

The launch of some platforms coincides with the launch of the governance token, which comes with an excellent airdrop. Governance tokens give users a say in how the platform evolves, so they give free money to users who interact directly and contribute to the ecosystem. People are winning crazy amounts of money just by betting and contributing to cash pools.

Risks in DeFi

All the benefits and gains of DeFi come from the fact that it is a decentralized permissionless space. But that also means it’s vulnerable to hackers, scammers, and smart contracts.

1. Hackers and scammers

• Because DeFi is decentralized, the space invites hackers to breach your defenses. That’s why you need to keep your keys in a safe place and if you can afford it, you can buy a hardware registry to be safe.
• Protocols and projects that promise to make you rich quick only to suddenly disappear with your money invested in their tokens. In the DeFi industry, you should research new projects before investing in them. This includes reading the whitepaper, checking Twitter and other social media, and interviewing the developers to find out if the project is legit.

2. Errors in smart contracts

• Smart contracts are basically a set of code that automates transactions to be executed. They are critical to the success of a project, and if there are any issues with the developer’s code, it could ruin the project in the long run. Either investors would lose faith in the project over time or it could self-destruct due to cracks in the system
• Faulty systems could allow experienced hackers to break into the project. Therefore, some projects take security precautions and are well audited to avoid such incidents.