By Abhishek Bajaj, Co-founder, DeFiVerse
Envision a world where you could deposit, invest and transfer money instantly, without ever having to go through the services of a bank. Envision a world where you would not have to rely on someone’s approval before making an account and using it for your monetary needs. Envision a world where the limitations of traditional finance would no longer apply- where you would be in sole control of your finances. This is the promise of ‘DeFi’.
Short for Decentralized Finance, DeFi is an umbrella term for all kinds of financial services built around the blockchain. What is most radical about this emergent space is the use of custom code or ‘smart contracts to handle all interactions within its financial ecosystem.
This code-based infrastructure is what makes DeFi extremely reliable and transparent, as opposed to traditional banking systems which are prone to misregulation and corruption. As this new age financial sector develops and grows in popularity, there is immense value in learning the fundamentals of this space. In this article, we’ll look at how a beginner can enter the world of DeFi and earn money through various strategies.
Crypto Wallets and CEXs
To get started in DeFi, the first step is to set up your crypto wallet. A crypto wallet is like a bank account as well as a digital passport, all in one! When accessing any DeFi service, you will need to connect your wallet to the relevant ‘dApp’(Decentralized Application).
The most popular way to set up your wallet is via Coinbase for the Bitcoin
blockchain and via Metamask for the Ethereum blockchain. For more serious users, ‘hardware wallets’ such as Nano Ledger provide a safer option.
Once the wallet is ready, the next step is to acquire some crypto! Depending on the country you are in, you can convert your Fiat currency into crypto via
‘Centralized Exchanges’ or ‘CEXs’. These exchanges act as doorways that
connect crypto to the world of mainstream currencies. Popular CEXs such as Binance and Kucoin allows you to easily buy cryptocurrencies and transfer them to your wallet.
Once this is done, you’re ready to embark on your DeFi journey.
But before moving forward, a quick note to the reader- This article is meant
purely for educational purposes and is not sponsored by any services, products, or institutions being mentioned.
Basic DeFi strategies
While the best DeFi strategies can seem complex on the surface, they are
actually created by combining basic DeFi tools, also known as ‘Money legos’.
Let’s explore some of these fundamental tools.
Staking is a simple process where users lock up their crypto to earn a yield
on their assets. A special use-case of this strategy is ‘Liquid Staking’,
where users can stake their crypto and receive another staked version of
the same, all the while generating interest. These assets can be used
elsewhere in the market or in other DeFi protocols.
Commonly-used dApps: Lido Finance, Rocketpool
– Trading & Derivatives
Just like the regular stock market, DeFi also offers Swaps, Leverage
Trading, Options and Futures on all popular cryptocurrencies. The only
difference is that the transactions take place on Decentralized Exchanges
(DEXs) such as Uniswap, GMX and Lyra Finance.
– Liquidity Providing
Users can provide ‘pairs’ of crypto to Decentralized Exchanges and earn
fees from trades made between those pairs. E.g. User provides ETH &
USDT and earns fees when a user swaps between ETH and USDT.
Commonly-used dApps: Uniswap, Curve finance
– Yield Farming
Some DeFi protocols incentivise Liquidity Providing (explained above) with
rewards in the protocol’s native tokens. Through smart contracts, these
rewards can be automatically reinvested for compounding returns. This is
known as Yield Farming.
Commonly-used dApps: Yearn finance, Beefy finance
Users can park their unused crypto in Lending Protocols to earn risk-free
interest. But the more exciting use of these tools is ‘overcollateralized
loans’- users can deposit crypto as collateral and borrow up to 50% of the
value in stablecoins (coins that mirror the price of Fiat currencies e.g.
USDT). These stablecoins can further be used in other DeFi strategies.
Commonly-used dApps: Aave, makerDAO
– HODL (‘Hold On For Dear Life’)
Perhaps the most well-known crypto term, HODL is seldom understood as
a serious investment strategy. However, HODLing or holding onto your
crypto through market storms is a time-tested method to multiply your
While the above strategies might seem exciting by themselves, the real thrill of DeFi is in weaving unique strategies out of these basic building blocks and
maximizing gains in creative ways. Thus, long-term success in DeFi is possible only with sufficient knowledge and effort.
Disclaimer: The strategies mentioned have risks associated with them and it is the reader’s responsibility to DYOR (Do Your Own Research). This article is not meant to be financial advice.
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