Decentralized Finance (DeFi) 101

Hey y’all!

In my past few posts, I’ve alluded to the concept of Decentralized Finance (more affectionately known as “DeFi” in the crypto streets lol). This week’s post is dedicated to breaking down the concept, sharing strategies you can use today to get started with DeFi, and also discussing my perspective on how DeFi will transform the future of finance. Below are the three key questions I plan to answer:

• What is Decentralized Finance (DeFi)?

• What are DeFi strategies?

• How will DeFi impact the future of finance?

DeFi: The Breakdown 🙏🏽

In Web3, decentralization rules everything. Instead of the legacy, centralized banking system that we all know today, DeFi provides an easier way for consumers like you and me to access capital and financial services directly.

Think about how we interact with systems today—there’s a whole lot of gatekeeping and middlemen controlling who has access to different services. For example,“Today, you might put your savings in an online savings account and earn a 0.50% interest rate on your money. The bank then turns around and lends that money to another customer at 3% interest and pockets the 2.5% profit. With DeFi, people lend their savings directly to others, cutting out that 2.5% profit loss and earn the full 3% return on their money.” — Forbes.

Another key thing to call out is that cryptocurrency and blockchain technology are core functionalities fo DeFi. “When you make a transaction in your conventional checking account, it’s recorded in a private ledger—your banking transaction history—which is owned and managed by a large financial institution. Blockchain is a decentralized, distributed public ledger where financial transactions are recorded in computer code.” — Forbes.

3 DeFi Strategies You Should Know 🎯

DeFi strategies are all designed to help you make passive income off of your crypto investments. While they can seem advanced at first, I often compare them to investing your money in the stock market and making ~ 10% returns each year vs. letting your money sit in your bank account generating a very small percentage of returns. Taking that extra step to set up an investment account leads to a lot more money for you in the future!

Strategy 1: Staking (beginner-ish)

I’m starting off with a concept that I’ve covered in previous posts pretty thoroughly! If you missed my Staking 101 post, be sure to read through it. For those of you who need a quick refresher, here’s a short excerpt from the post:

“Staking your cryptocurrency allows you to generate passive income using your crypto the same way that putting your money in a high yield savings account allows you to generate interest. When you stake some of your holdings, your crypto usually gets contributed to a staking pool. This means that your crypto earns rewards by being in the staking pool because the blockchain is putting your crypto to work!

Basically, you’re allowing the blockchain’s developers to use your cryptocurrency to improve the technology behind the project. In return, they give you rewards. I’ve seen anywhere from 8% returns to 400% returns for the most risky projects. This is WAY better than the 0.000001% these “high yield savings accounts” give you. Side-eyeing you, Marcus by Chase…🙄” — Me

I’m currently staking some of my Ethereum using Instadapp Lite! As I mentioned in a previous post, it’s sooo easy once you own the crypto. Highly recommend if you’re looking to generate passive income!

Strategy 2: Obtaining Liquidity Provider Status (advanced)

Now I have no idea if these next two strategies are actually considered advanced, but they took me a while to understand and I have yet to do either of them so, in my opinion, they’re advanced lol.

According to Global Coin Research, “Liquidity providing is a method in which investors in smart contracts, or liquidity providers, can earn 0.3 percent of the value acquired through token exchange. For example, if Ethereum tokens are exchanged for USDT, a liquidity provider can make an extra 0.3 percent equal to the amount they staked in the smart contract.

Staking and liquidity provision is, in essence, linked. You can reap the benefits if you stake your tokens on a smart contract that exchanges tokens.”

Strategy 3: Yield Farming (advanced)

According to Global Coin Research, “Yield farming is the practice of utilizing the tokens you’ve earned as a liquidity provider on a yield farm to make money. A yield farm is similar to a smart contract in that you can earn more of the same token as time passes if you stake your tokens on the platform.

To elaborate on the notion, yield farms are lending platforms that leverage your tokens to lend to borrowers. In exchange, you will receive rewards in the form of comparable or different tokens.

The notion of yield farming is comparable to typical fiat money time deposits, except that yield farming can offer huge payouts, but only if you’re ready to incur high risks.”

How DeFi Will Impact the Future of Finance 💸

Before sharing my thoughts on this topic, one of my biggest critiques of DeFi (and honestly a lot of this Web3 stuff) is that it’s not currently user friendly and if you’re not a technical person by nature it can feel extremely intimidating. I get it. Even as I was learning about DeFi strategies beyond my tried and true staking method, it took me a while to grasp the concepts. Shoot, I still don’t FULLY understand the 2nd and 3rd ones I shared enough to participate myself.

I believe that in order for us to reach mass adoption, the Web3/blockchain community needs to invest heavily in user experience and design research. This technology will transform the future of finance, but if the every day person can’t reap the benefits it’s worthless. So, if you’re a design person and you happen to be reading this newsletter, I have a hunch that there will be a major boom in demand for your expertise over the next 5 years. And if you’re looking to pick up a new skill, you may want to look into user experience and design!

Anyway, much to what I’ve already been preaching over these past few months in this newsletter, DeFi is all about the decentralization of financial systems. It’s about increasing transparency and privacy for all consumers. It’s about removing the middle man and ensuring that we get the direct financial benefits from lending our money out. As NetGuru says, “many functions of banks would eventually move on blockchain infrastructures." Is this the demise of the big banks we all know today? Probably not, if they can get ahead of it. But I’m curious to see how exactly these centralized giants transform to adjust with the movement… Only time will tell! That’s what’s so exciting about being at the beginning of all of this. :)

This week’s recommended action: Watch this tutorial on DeFi Staking & Farming!