Intro
Decentralized finance (or DeFi) is a financial field in the cryptocurrency market focused on providing decentralized financial services and solutions. It includes numberless financial protocols created by developers and what is the most crucial — everyone can access it. These services are an alternative to centralized ones, as they aren’t a subject of officials' and intermediaries' control. Instead, they are run by people through decentralized organizations and give users vaster control over their funds.
The DeFi sector is a hub of innovation with new decentralized and non-custodial financial options for those who get rid of the rather conservative centralized world of finance. Accessibility is the major DeFi advantage as you can enter it anywhere and anytime. Why is that so important?
The data speaks for itself — more than 13 million adults in Europe and approximately 5.9 million U.S. citizens are estimated to be unbanked — without an account at a financial institution. Financial services on DeFi protocols have no entry requirements so anyone can access financial services through it. The only entry barrier, in essence, is the know-how.
The DeFi ecosystem uses public distribution networks and smart contracts technology, self-executing agreements written into lines of code, guaranteeing that access to financial services is democratized and not corrupted. Finance is getting affordable for everyone. Marx’s dream is becoming true in some way.
Other Reasons Why You Should Care
It’s not a secret that DeFi is a rapidly growing field that is covered with many projects influencing the market. A great example of such is Optimism which is a Layer 2 Ethereum blockchain aiming to boost transaction speeds by scaling the ecosystem through off-chain computation. After the upgrade to The Merge, the network could process around 100,000 transactions per second. Layer 2 solutions will further improve that capacity.
The optimism token plays a crucial role in DeFi development, as well. As Optimism speeds up Ethereum transaction processing and reduces costs thanks to its Layer 2 solution, it makes DeFi on Ethereum more straightforward for users.
Optimism also enhances the security and reliability of Ethereum transactions. This makes DeFi easier to use and boosts user confidence in DeFi on Ethereum. Thus, DeFi is gaining mass adoption thanks to Optimism alike solutions.
How to Use DeFi Protocols?
DeFi protocols are commonly built on top of Ethereum or Binance Smart Chain, and some other competing blockchain networks with support for smart contracts which number is booming. Before starting to use the DeFi services, it’s important to choose a network.
All popular protocols support multiple blockchains, and the difference between them is often ease of use and transaction fees. Ethereum, Binance Smart Chain, and Polygon are examples of those protocols, and all are accessible through crypto wallets.
Crypto wallets provide users with access to their funds directly. Besides, these wallets often have mobile applications to access DeFi projects without fuss. These applications are wallets with built-in browsers ready to be connected to DeFi applications. Users can synchronize their wallets by creating them on one device and importing it to the other using the seed phrase or private key.
To make things even easier, these wallets have an open-source WalletConnect feature allowing users to connect their wallets to DeFi applications on desktop devices simply by scanning a QR code with their phones.
Ways to Invest in DeFi
Lending and Borrowing
Lending and Borrowing are central elements of any financial system. In the DeFi sector, lenders provide funds to the protocol and are able to earn a return on the funds that people borrow.
They are available instantly, that’s why borrowers are ready to pay interest for assets to borrow. Users need to over-collateralize if they want to borrow crypto assets. Overcollateralisation happens when the collateral’s value is higher than the borrowed loan. To put it simply, what you lock in is more than what you take out.
Borrowers can use one token as collateral and receive a loan for another. In this way, users can farm yield (see below) with the borrowed coins and keep their initial holding, which may increase in value over time.
Staking & Lockups
Staking is when users commit a definite amount of tokens or coins to become a so-called ‘validator’ in a Proof of Stake (PoS) blockchain network. As for lockups, they refer to ‘locking up’ crypto assets as liquidity on a DeFi platform in return for interest.
If you aren’t ready to commit to becoming a validator yourself, you can also participate in staking via Delegated Proof of Stake (DPoS) which is one of the popular alternatives of Proof of Stake consensus. It relies on the voting process for the selection of delegates, who would validate the next data block.
Staking pools are an opportunity for people to lock their tokens into a pool to earn interest, based on the size of their deposit concerning the pool’s total holdings.
DPoS allows all users to participate in staking by ‘delegating’ their assets to a validator. Instead, they receive rewards, while the validator meets the computing requirement on the blockchain.
Yield Farming
It is a subset of staking. Yield farming is a strategy involving lending or staking crypto assets to get rewards as an annual percentage yield (APY).
You can also place LP tokens, which represent the number of assets you have contributed to a liquidity pool, into a ‘farm’. This is another example of how you can be rewarded for your liquidity provision.
Liquidity Mining
In the world of finance, liquidity means how fast an investment can be sold while maintaining its value. Thus, the more liquid an investment is, the quicker it can be sold, and the easier it is to sell it for its current market value.
Liquidity mining is a yield farming subcategory that adds functionality to the crypto community. By lending your assets to a decentralized exchange (DEX), you are providing liquidity and receiving rewards, which most often stem from trading fees that are accumulated by traders swapping tokens.
Liquidity Pools
A liquidity pool usually consists of a pair of tokens, with a required value ratio of 1:1, with each pair creating a new market. Providing assets to these pools makes you an LP, or a liquidity provider. LPs should contribute an equal value of both tokens to the pool.
As an example, if you deposited CRO and ETH into a liquidity pool, the pair gets swapped into a CRO-ETH LP token that represents the value of both currencies.
Each time a person uses the liquidity pool, they have to pay a small fee, which automatically goes to the Automated Market Maker (AMM). These fees go to LPs to the pool as a reward, proportional to the amount of liquidity they provided.
Guide: 3 Steps For Entering DeFi
Set Up Your DeFi Wallet/App
The Notum app is a great way to start your crypto investments with ease. It’s a non-custodial way that gives you full control over your funds and private keys. You create a passcode and get a twelve-word recovery phrase. If you would like to make your wallet even more secure, set up Face ID biometrics and two-factor authentication. As you are the only owner of your assets, it is crucial to physically write down this recovery phrase and store it securely offline. It could be a piece of paper or a flash drive. Sounds a bit outdated, but pre-warned is pre-armed.
Top Up the Wallet & Get Crypto Assets
Choose from 250+ assets within the Notum app to delve into the DeFi market. Currently, most DeFi protocols run on Ethereum, so you need to buy ETH or an ERC-20 coin to interact with them. If you still want to use Bitcoin, you’ll have to exchange it for an ETH version of Bitcoin, like Wrapped BTC.
How to Purchase Tokens and Coins
The next thing you need to get started with DeFi is assets. It entirely depends on your goals what tokens or coins you’ll choose to buy. The case here is that cryptocurrencies have different functions and perks, and some can be used on more than one blockchain. There are BTC and ETH devotees and some people place bets on stablecoins. The crypto assets landscape is a diverse one, meaning that you have a whole pool of possibilities to grasp.
Here is the beginning of your DeFi story. Now that you have a comprehensive and reliable app and some funds to invest, you are welcome to enter the DeFi space and try different strategies for earning passive income.
Make Your Crypto Work For You
As it was mentioned above, you have a wide range of different strategies for entering the DeFi market and earning some crypto income. The main advantage of using DeFi is that you won’t have any third parties. Users can review the code written in the smart contracts as most of these protocols are run by decentralized autonomous organizations (or DAOs), not centralized companies. This all makes the DeFi space quite safe, profitable, and seductive.
You need carefully observe all the opportunities such as liquid staking, DeFi lending, staking, farming, etc., and DYOR to make the right decision.
To find out more about how the Notum platform could assist you in your crypto journey and help to grow your crypto wealth – read this quick guide or the following post on various DeFi strategies available within the Notum.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.