Updated: Mar 9, 2021
The promise of cryptocurrency is its ability to enable anyone with the internet to make payments literally from anywhere cheaply and without the need of a centralized bank. It's completely trust-less without boundaries. Decentralized Finance (DeFi) takes this concept even further, enabling anyone with the internet to have traditional financial products, like savings accounts, insurance and loans, but with far greater liquidity and seamless automation. Now imagine all that, plus yields that are dramatically larger than anything a typical bank can offer today, and you can see the potential money one can make.
A New World
The world of cryptocurrencies is growing at a fierce rate. What started off as an innovative digital payment system with the advent of Bitcoin, has turned itself into a whole industry of its own. Today, the cryptocurrency space exists as a vibrant ecosystem of traders, investors, speculators, and domain specific roles. The consequence of this rapid development has equipped cryptocurrency holders with different options through which they can earn sizable passive income.
One of the most popular and rapidly growing domains in the cryptocurrency space these days is DeFi. DeFi is short for Decentralized Finance, which is basically an amalgamation of trust-less, programmable financial technology, applications and services.
In a nutshell, DeFi applications make use of automated, programmable contracts (smart contracts) to devise self-executable and transparent business services. In other words, a service- such as getting a loan- is 100% programmable and therefore automated. This means there is no need for a centralized institution like a bank to share profits with, nor demand things like a great credit score.
What is DeFi?
The procedures made possible through the use of smart contracts are known as DeFi protocols. These decentralized peer-to-peer lending protocols offer many ways to make income from the DeFi space. The most interesting aspect of all this is that it has made the lending and borrowing process a reality for the billions of unbanked people around the world, potentially lifting them out of poverty.
There are many types of borrowing protocols, but we won't go into the technical details of how each of them work. Just know the flow of the whole lending and borrowing process is similar to the loan structure in today's traditional financial sector. For instance, nearly all DeFi platforms offer savings accounts. They allow its users to lock their digital assets - such as Ethereum- in a smart contract to start earning interest on it immediately. On the flip side, borrowers can lock digital assets like Ethereum in a smart contract as collateral, and then borrow money at favorable rates. The money comes in the form of a digital asset such as a cryptocurrency, but can be converted into whatever one chooses- including the US dollar. You would just need to send the money to an exchange, such as Coinbase.com or Binance.us.
At the present moment, users have deposited over $6 billion dollars worth of cryptocurrency into these smart contracts. Every day, users are experiencing a growing number of options of what kind of digital assets are available to lend and borrow, including cryptocurrencies like Ether and Bitcoin and stablecoins (pegged to the US dollar) such as USDC and Dai.
The Best DeFi Platforms
Fascinated yet? Let’s take a gander at a few of the most popular DeFi platforms out there making headlines. You’ll need a cryptocurrency wallet with a built-in dapp browser. There are many such wallets, but your safest, best bet is the Coinbase Wallet. The Coinbase Wallet easily integrates with the two dapps (decentralized apps) discussed below.
One of the most popular DeFi applications right now is the MakerDAO platform. Dai is its native stablecoin and makes the lending and borrowing activities possible. In essence, it is a smart contract which allows users to open collateralized debt positions. On this platform, users can deposit Ether as collateral, and are rewarded with interest in the form of DAI tokens. Because of supply and demand, DAI has allowed impressive rates, as much as 5%-20% returns for lenders. Therefore, a user can earn passive income by simply owning and holding DAI tokens. Over 400 applications have integrated Dai, including decentralized wallets, DeFi platforms, games and more.
Compound is another successful blockchain-based borrowing and lending dapp. As with the MakerDAO platform, you can lend your crypto out and earn interest on it. All you'd have to do is create a wallet with a built-in dapp browser, such as the Coinbase wallet. Then deposit your cryptocurrency to the Compound smart contract as collateral, and borrow against it-- like you'd borrow against a house. In fact, many have used Compound to borrow money to buy a house of their own.
As with MakerDAO, the Compound contract automatically connects the right borrowers and lenders, and adjusts interest rates automatically based on supply and demand. And voila! The journey to earn enormous passive income has just begun!
How to buy Cryptocurrency to use in DeFi
Before you do anything in the DeFi space, you'll need to have a cryptocurrency to work with. If you don't have any, you'll need to buy it off an exchange- like Coinbase.com or Binance.us. If you're a newbie to buying crypto, visit our page on "How to Buy Cryptocurrencies". It'll take you through a step by step process.
Lastly, I will end this post with a great video by Finematics. I'm a big fan of their videos and will frequently link to them in future posts, especially those that get more into the nitty gritty of DeFi's tech.