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DeFi
Decentralized Finance
DeFi is a fast-growing sector that aims to revolutionize traditional banking and lending methods.
Decentralized
Finance
DEFI Benefits
DeFi enables you to earn interest on your idle crypto tokens, borrow funds, secure insurance, and more without needing to go through a third-party entity.
DeFi Crypto Explained
DeFi is a relatively new segment of the cryptocurrency and blockchain technology arena. The overarching objective of DeFi is to replace conventional banks and financial institutions with decentralized smart contracts.
Example:
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Let’s suppose that you wish to earn interest on your savings.
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When putting your capital into a traditional savings account, you will likely earn in the region of 0.1% per year.
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In comparison, when depositing crypto tokens into a DeFi platform, you can earn double or even triple-digit APYs.
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Moreover, there is no requirement to go through a centralized body, as DeFi platforms are decentralized.
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Therefore, you do not need to trust that your money is being well looked after, as the tokens are held by a smart contract that is immutable.
The above example can be achieved in a number of different ways – such as through a crypto interest account, staking, or yield farming. We explore these terms in great detail throughout this guide on DeFi crypto.
Another segment of the DeFi sector centers on borrowing capital. Ordinarily, if you wish to take out a loan, you would go through a bank or online lender.
DEFI LOAN, LENDING & CREDIT
The provider in question would ask you to fill out an application form that details specifics surrounding your financial profile and credit history.
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At the other end of the scale, you have DeFi crypto loan platforms.
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These are decentralized providers that allow you to borrow funds without needing to provide any personal information or have a credit check run on you.
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No documents need to be uploaded to support your loan application either.
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Instead, DeFi crypto lending sites simply require you to put up a security deposit in the form of crypto – and your loan will be approved instantly.
DeFi crypto platforms put everyday financial services back into the hands of ordinary citizens. As a result, you can retain full control over your financial needs rather than needing to go through a third-party institution.
DEFI LOAN, LENDING & CREDIT
DeFi crypto platforms put everyday financial services back into the hands of ordinary citizens. As a result, you can retain full control over your financial needs rather than needing to go through a third-party institution.
The provider in question would ask you to fill out an application form that details specifics surrounding your financial profile and credit history.
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At the other end of the scale, you have DeFi crypto loan platforms.
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These are decentralized providers that allow you to borrow funds without needing to provide any personal information or have a credit check run on you.
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No documents need to be uploaded to support your loan application either.
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Instead, DeFi crypto lending sites simply require you to put up a security deposit in the form of crypto – and your loan will be approved instantly.
How
DEFI
Works...
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So now that we have covered the basics, this section of our beginner’s guide on DeFi crypto will break down the core fundamentals of this sector.
To begin, we will explore some of the most common ways that DeFi allows you to generate an attractive yield on your money.
The first niche market that DeFi is all but certain to replace in the near future is that of conventional interest accounts. In the US, retail banks are still paying less than 0.10% per year to savers. Although this might increase slightly in response to the Federal Reserve hiking interest rates, don’t expect this to surpass an APY of 1% any time soon.
Decentralized Finance
Interest Account
DEFI APY%
You might also look at CD accounts, which offer a higher rate of interest when you agree to lock your funds for a minimum number of months or years. Nonetheless, CD accounts still pay a pittance, so you’ll be lucky to get more than 2-3% annually.
In comparison, the best DeFi crypto platforms in the market will offer much higher returns.
Example:
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You can deposit USD, EUR, or GBP into leading crypto interest account provider Aqru
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You can then convert your deposit into a stablecoin like USD Coin (USDC) – which is pegged to the US dollar
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In doing so, you will earn an APY of 12%
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Best of all, unlike CD accounts, there are no lock-up terms to meet when using Aqru.
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In addition to being able to earn 12% annually on stablecoins, Aqru offers an APY of 7% on both Bitcoin and Ethereum.
DeFi Crypto Staking
DeFi Yield Farming
DeFi Yield Farming investment scene is somewhat similar to staking, insofar as you will generate a yield for lending out your tokens.
However, while staking requires just one crypto asset, yield farming will see you lend funds to a trading pair. This is because the tokens will be used to provide liquidity for buyers and sellers at the respective DEX.
Example:
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Let’s say that a DEX offers the trading pair ETH/DAI
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This means that traders can use the DEX to swap ETH tokens for DAI – or visa-versa
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However, in order for traders to be able to do this without a third party, there needs to be a sufficient number of tokens deposited into the liquidity pool
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And, by providing the liquidity needed with your idle crypto tokens, you will earn a yield.
When utilizing a DeFi yield farming platform, you will need to provide equal amounts of each token within the respective pair. For example, if you provide $500 worth of Ethereum, the same amount needs to be supplied in DAI.
In terms of APYs, this won’t be fixed like in staking. Instead, you will receive a percentage share of any fees collected by the DEX – when buyers and sellers trade the pair that you have provided liquidity for.
DeFi
Loan Facilities
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DeFi Crypto Sites will oftentimes provide instant loan facilities that require no credit checks or even personal information.
In order to obtain a DeFi crypto loan, you simply need to deposit some collateral. The LTV (Loan-to-Value) ratio that you have access to will depend on the platform you are using, albeit, this typically averages 50%.
By depositing collateral of $4,000, you will have access to an instant credit line of $2,000. Best of all, many DeFi loan sites not only give you the option of receiving your borrowed funds in crypto – but fiat money too.
As a result, this can be a great way to access real-time financing without needing to sell your digital asset holdings. If the assets that you deposit as collateral appreciate while the loan is outstanding, you will still benefit from this.
DeFi Swaps
Another popular segment of the DeFi crypto space is the ability to swap assets without needing to go through a centralized broker or exchange.
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For instance, let’s suppose that you wish to swap Tether for DAI – because you believe that the latter is the safest stablecoin of the two.
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Ordinarily, you would need to transfer the Tether tokens from your private wallet and into a centralized exchange after opening an account.
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You would then need to manually exchange Tether for DAI
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You would then be required to withdraw the DAI back to your private wallet
The above process can be completed at the click of a button on a DeFi crypto site without needing to transfer any tokens to a centralized exchange.
Instead, the process is instantly carried out by a smart contract. This feeds back into the previously discussed section of crypto yield farming.
In the very near future, we will likely see DeFi swaps go above and beyond just crypto assets. Perhaps, it might be possible to swap gold for silver or stocks for bonds. Ultimately, the possibilities are endless with DeFi.
Why DeFi is Important
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The introduction of Bitcoin and the blockchain protocol in 2009 created a life change in how we view money.
That is to say, it has since become apparent that we no longer require conventional banks and centralized providers to access everyday financial services like savings, interest, loans, and international transfers.
Instead, DeFi enables us to access the aforementioned services without the need for a centralized body at all. Instead, the entire industry works on the peer-to-peer ethos.
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This means that you can transfer funds to friends and family without needing approval from a bank.
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This also means that you can earn interest on your idle digital assets without needing to deposit anything into a centralized account.
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And moreover, this also means that you can access financing without needing to go through a long and drawn-out application process or check with a traditional lender.
Not only does DeFi allow us to bypass the middleman, but this also reduces the cost of doing business. It’s similar to open source crypto.
For example, let’s suppose that you wish to borrow funds to cover a short-term debt. The standard process would require you to fill out an application form that asks for your personal information and financial background.
The lender would then run a credit check to assess whether or not you can afford to repay the loan. This cumbersome application process can be costly for lenders, which in turn, will result in high-interest rates.
However, when using a DeFi crypto loan platform, there are no credit or affordability checks, so you will benefit from much lower APRs.
Decentralized Finance
vs
Centralized Finance
At the heart of DeFi is its decentralized status. This means that when using a leading DeFi platform like DeFi Swap, there is no interaction from centralized third parties.
The reason for this is that decentralized finance providers take advantage of smart contract technology. The underlying code backing the smart contract is both immutable and transparent – just like its blockchain counterpart.
And, smart contracts on decentralized finance sites allow the platform to operate autonomously. This means that users can engage with DeFi crypto investment and lending products without actually needing to deposit funds.
Instead, you simply need to connect your crypto wallet to the DeFi platform and choose the service that interests you. This is in stark contrast to how centralized finance providers work.
For example, let’s suppose that you wish to invest in stocks with a traditional broker. In doing so, you would be required to:
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Open an account by providing a wealth of personal and financial information, alongside your contact details and social security number
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Upload KYC documents – such as a copy of your government-issued ID and proof of address
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Make a deposit into your account
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Search for assets and leave them in your brokerage portfolio
There are many issues with the above processes executed by centralized finance providers. First and foremost, you are required to supply a significant amount of personal data – which then needs to be backed up by documentation.
In comparison, decentralized finance platforms require no personal information or contact details from you.
You then have the issue surrounding deposits and investments. When using a centralized finance platform, you need to trust that the provider will keep your payment details secure and that your investments are safe.
On the other hand, decentralized finance platforms do not act as a custodial for your funds or investments at any time. On the contrary, payments and transactions are handled by smart contracts autonomously, which the DeFi platform cannot amend.
Therefore, many would argue that DeFi providers are not only less intrusive than centralized finance platforms, but more secure.
Very Attractive Yields
APY%
It goes without saying that one of the biggest benefits of DeFi crypto is that the sector gives you the opportunity to earn very attractive yields.
Although the specific APY will depend on your chosen platform and token, as well as the lock-up term and specific DeFi product, double and triple-digit APYs are highly achievable.
This will allow you to grow your wealth at a much faster rate when compared to depositing funds into a conventional checking or savings account.
DeFi Passive Income
Another benefit of DeFi crypto is that you can earn income passively. Irrespective of whether you opt for an interest account, staking, or yield farming – once you have made a deposit there is nothing else for you to do.
This will appeal to investors that wish to generate a return on their capital without having to constantly research the markets.
Retaining Full Control Over Your Wealth
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Whether you have US dollars in a bank account, digital assets in an exchange, or stocks in a brokerage account – there is one common denominator. That is to say, you never really have full control over your wealth.
After all, what if your bank decides to freeze your account or your crypto exchange provider is hacked remotely? Either way, you can never be 100% sure that your funds are safe.
Once again, this is where DeFi comes in. First and foremost, if you hold your digital assets in a DeFi wallet, you are the only person to have access to your private keys and password.
This means that no matter what, the provider of the DeFi wallet is not able to gain access to your funds. Therefore, you retain full control of your digital assets at all times.
Another thing to note is that DeFi platforms never touch your tokens when you utilize one of its investment products.
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For instance, let’s suppose that you wish to use DeFi Swap to benefit from a staking APY of 75%.
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To proceed, you simply need to connect your wallet to the DeFi Swap website.
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Then, after choosing your required terms, the DeFi Swap smart contract will transfer the tokens from your connected wallet and into the respective staking pool.
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When the staking term concludes, the smart contract will transfer your original tokens plus interest back into your wallet.
All in all, DeFi is slowly but surely putting control back into the hands of individuals and away from centralized banks and financial institutions.
Best DeFi Platforms
This guide has so far explained the ins and outs of how DeFi crypto works. In this section, we are going to discuss the best platforms that operate in this space.
The DeFi platforms discussed below offer a variety of investment and lending products, yields, terms, and payment methods – so be sure to read our reviews in full.
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Top DeFi Coins
1. DeFi Coin – Overall Best DeFi Project to Invest in
DeFi Coin (DEFC) is the underlying token that backs the DeFi Swap exchange – which we found to be the best decentralized platform in this industry. And therefore, by adding DeFi Coin to your portfolio, you can indirectly invest in the future success of DeFi Swap.
However, it is important to note that DeFi Coin not only gives you the opportunity to target above-average capital gains, but you can also earn interest passively. The DeFi Swap platform gives you two options in this respect. First, you can provide liquidity to the platform via the DEFC/BNB pair. This means that you will need to provide equal measures of both tokens.
But in doing so, every time that somebody exchanges DEFC for BNB (or visa-versa), you will receive a percentage of the fee that they paid. The second option is to deposit your DeFi Coin tokens into the DeFi Swap staking pool. Depending on whether you opt for a 1, 3, 6, or 12-month staking term, you can earn up to 75% annually on your DEFC tokens.
Another reason that we like DEFC as the overall best DeFi Coin to buy is that the project rewards long-term investors. This is because there is a 10% tax on each buy and sell order. As such, you will receive a share of this tax for as long as you remain a DeFi Coin holder. The more DEFC tokens you own, the more you will receive.
2. Lucky Block – Top-Performing DeFi Gaming Project
Next up we have Lucky Block (LBLOCK) – a new and exciting DeFi project that focuses on daily crypto draws. In a nutshell, by holding the winning ticket for the daily prize draw, you will be entitled to a share of the jackpot.
And, each ticket costs just $5 – to be paid for in LBLOCK tokens. You can, however, get one free ticket entry per day by connecting your wallet to the Lucky Block app. Either way, according to the blockchain ledger, the Lucky Block project already has in excess of $2 million to dedicate to its jackpot draws.
In terms of the LBLOCK token itself, it is actually one of the best-performing digital currencies of 2022 to date. For instance, if you bought Lucky Block tokens during the pre-sale in January 2022, you would have paid just $0.00015.
3. USD Coin – Solid Stablecoin to Earn a High DeFi Yield
There are many stablecoins that allow you to earn a solid rate of interest at DeFi platforms. However, not all stablecoins are safe – as we saw from the recent Terra USD saga. With that said, we would argue that USD Coin (USDC) is as solid as it gets in the stablecoin space.
After all, USDC is 100% backed like-for-like by US dollars in an audited bank account. Furthermore, the stablecoin is backed by Coinbase and Circle – both of which have solid reputations in this industry.
4. Decentraland – Popular DeFi Platform for Real Estate
It can take some time to get your head around how Decentraland works. Nonetheless, in its most basic form, Decentraland offers a virtual world that lets you create an avatar and communicate with other users.
More pertinently, you can buy plots of land within the Decentraland metaverse and then build your own project – such as a villa or store. Either way, you can then list your real estate for sale on an online marketplace.
5. Yearn.finance – P2P DeFi Loans and Yields With Growing User Base
The final project to consider from our list of the best DeFi coins is Yearn.finance. This project offers a P2P-style platform that connects borrowers and investors. Put simply, you can deposit your funds into Yearn.finance and earn a yield.
No Deposit Insurance
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The first thing to note is that when you deposit funds into a DeFi crypto account, you will not have access to the same investor protections as seen in the conventional banking industry.
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For example, in the US, the FDIC covers bank deposits up to the first $250,000 – should the respective financial institution go bust.
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In the UK, there is the FSCS, which covers UK bank deposits up to the first £85,000.
However, if you deposit funds into a DeFi platform and something goes wrong – such as a smart contract failure or an external hack, then you will have nowhere to turn.
This is because traditional deposit insurance schemes do not cover crypto assets.