Is Defi the Wild, Wild West?
DeFi has become the choice means among many crypto traders to invest in cryptocurrencies. DeFi, or decentralized finance, is the term used to describe global, peer-to-peer financial services available to all and on public blockchains. And, if you overhear someone bragging about how they staked their crypto assets and earned higher returns with more crypto coins – a practice called “yield farming” -- they’re likely talking about their wild adventures in DeFi.
Honestly, Ape-ing into volatile coins for yield farming is a recipe for disaster. You need to be smart when yield farming, otherwise you’ll go bananas (Benji) over potentially huge losses. Let’s go over DeFi to avoid those rookie mistakes.
What is DeFi?
So, you’ve taken the plunge and purchased your first cryptocurrency. Let’s say you purchased one of the following:
Now what? Just HODLing crypto in your wallet (or, more eloquently, Holding On for Dear Life) is neither very exciting nor financially rewarding. Like any traditional investment, be it stocks, bonds of funds, you should have the opportunity to invest, and grow, your crypto. Fortunately, there are services and products available that can put your capital to work for you. This, my friends, is the world of DeFi.
DeFi is a digital platform that enables you to put your crypto to work through virtual lending platforms and exchanges that takes our traditional financial system and removes the middleman (and all those costs associated with banker salaries, trader transactions, office buildings), putting you in charge. Think Wall Street without the Street; no cavernous roads, dark alleyways, tall skyscrapers, or traders taking smoking breaks here.
Rather, DeFi enables users to do many of the things they’d do in conventional banking – be it earn interest, lend, borrow, buy insurance, trade derivatives, or trade assets – but in a way that’s faster and doesn’t require third party paperwork. DeFi breaks the chains and exposes you to open-source protocols that are more accessible and more transparent. It empowers you and your money in the ether. How? In just two words: Smart Contracts.
This is how you will enter this new world. Smart Contracts are self-executing contracts that have the terms of the agreement between buyer and seller baked inside the lines of computer code. That code, and the agreements inside the contract, exist across the blockchain. What’s more, the code controls the execution, and, therefore, transactions are trackable and immutable. So, peer-to-peer transactions can be conducted between anonymous strangers safely and without the need of a central authority, be it a central bank or a legal system. Examples of a DeFi exchange include Uniswap or SushiSwap.
This can be very rewarding if you have the patience and don’t put a bullet in your head watching your money go up 60 percent down 40 up 20, down 10 down 60 up 10 etc.
Let’s now take a look at Ethereum and its impact on DeFi.
Ethereum is an open-source public service blockchain that facilitates smart contracts and cryptocurrency trading securely without a third party. In addition, Ethereum is a way to build decentralized applications through programmability and interoperability.
With DeFi, you don’t need single central parties holding up your funds. The Depository Trust and Clearing Corporation (DTCC) is a financial services company that provides clearing and settlement services for the financial markets. With Ethereum, however, its blockchain acts as a decentralized clearinghouse for transactions involving tokens and smart contracts. Millions of transactions are settled daily without a central authority, such as the DTCC as a gatekeeper. This makes DeFi very popular because you do not have a gatekeeper limiting the settlement timeframes of your transactions which often gives you less control over your money and higher fees.
I know, transaction fees on Ethereum – or so-called gas fees – can be outrageous (that’s not the point of this post). A recent, and sobering, example of insane gas fees was seen with the recent Bored Ape Otherdeeds NFT mint.
Easy Access to DeFi
No matter where you live, you can access financial services provided by your choice of blockchains. It doesn’t require red tape to access multiple documents and forms. More people own smartphones than banking accounts.
If you own a smartphone, DeFi can open financial services such as depositing funds, borrowing funds, taking out loans or exchanging and trading financial products without having to open an account or ask an establishment for permission. There are no forms you have to fill out as well for entry.
We are spoiled a little in the US. If you want to open a checking account, all you need is a government-issued ID to access the financial world. Of course, there are still oodles of documentation to fill out, but you have the access and means up front.
But what if you don’t have the documentation or your access is limited based on your geography, your gender or even your government? With DeFi, anyone can access financial services regardless of the above.
Now that I have piqued your interest, check out the most popular dexes below:
Let’s now put this in action using Uniswap. Login to Uniswap at app.uniswap.org.
Click on Pool | New Position. Choose a trading range. If you stay with in the range, you collect fees of every transaction in the form of apecoin and eth.
Choose your amounts.
Click Preview and Add Liquidity. That’s it. You will now earn fees in your trading range. Here is a link to see how often transactions are occurring.