DeFi (decentralized finance) technologies are the trend that first appeared in 2019, and since that time it has not only retained its relevance, but continues to gain popularity in today's realities.
DeFi – what is that thing?
At its core, DeFi is a set of high–tech financial instruments (applications or services) on various blockchains, the most common among which is Ehereum. Interaction in such an ecosystem is carried out without the participation of any central authority (this is the principle of decentralization).
It is a modern alternative to traditional banking services – deposits, lending, asset trading, insurance, money transfers and payments, which operates 24 hours a day. As for fees, they are minimum in DeFi.
Representatives of the crypto community noticed great prospects in this area, primarily due to the opportunities for obtaining passive income with a low entry threshold. Moreover, a potential investor does not even need a good understanding of any technical features of the blockchain - everything is relatively simple and as transparent as possible.
You don't even have to create some special account to interact with decentralized applications. It is enough to register an Ethereum wallet once and replenish it through any online exchange.
Why is it so profitable to invest in DeFi?
To date, DeFi can be considered as almost the only option for obtaining a relatively high passive income in crypto tokens. So, in 2020, the five largest DeFi platforms paid users an annual profit of up to 160%!
What does this profit consist of? DeFi projects seek to attract liquid assets from some clients (investors) in order to transfer them for use to other clients. Monetization is guaranteed by users fees. The more people are attracted, the larger the amount of fees, which means that the percentage of income from a particular protocol promised to the depositor also grows.
An additional motivation for investors is their own project tokens. As a rule, their value tends to grow well in the short term. An increase in demand for DeFi-platform assets and low fees provide conditions for the growth of investment rewards.
Different ways of using the opportunities provided by DeFi open up prospects for passive income to potential investors. By analogy with banks, DeFi protocols provide storage of digital assets for verification of transactions, implementation and further development of decentralized staking mechanisms (DPoS consensus).
Passive income on liquid pools
Profitable farming (liquidity mining) is a relatively young but already popular option for extracting additional income on cryptocurrencies due to the growth of the DeFi industry. It is assumed that the user invests his assets into a special liquidity pool in the form of a loan or a stake based on smart contracts, and gets a reward for this.
Money is redistributed according to DeFi protocols among other users or projects. Unlike a traditional bank deposit, the number of intermediaries is minimized, which minimizes interest on payments along the way of the transaction execution.
The accumulation of income is carried out in direct proportion to the user's balance on the DeFi platform account. Of course, like a traditional bank, the platform is interested in blocking the client's assets for a longer period of time.
Any Internet user with a crypto wallet is a potential liquidity provider. It is enough, for example, to put your funds into AAVE, the well-known decentralized online borrowing and lending service.
Let's assume that the investor's annual interest rate is 9%, and considering all interest payments, the investor will receive 8%. The decentralized exchange combines liquid funds by creating its own tokens, which will later be available for redemption at a favorable rate for the depositor.
Most popular platforms for DeFi investments and lending
First of all, it is important to understand that DeFi offers no magic schemes of getting rich. If you at least superficially understand the mechanisms of the blockchain and automated market makers (AMM or, quite simply, decentralized exchanges) - feel free and confident to enter the industry and get generate passive income!
Initially, DeFi platforms were looking for experienced users with large capitals. Today, these requirements are maximally updated for ordinary users. So, let's consider some of the platforms.
Singularity DAO is a Defi platform where professionals are involved in trading crypto assets (tokens), and artificial intelligence assists them in it.
Tokens of this system exist in the form of a special kind of assets – DynaSets, – after placing money in which you can allocate a certain percentage of DynaSets in LP tokens. Representatives of the platform assure that the performance of DynaSet services exceeds the capabilities of both Bitcoin and Ethereum blockchains. The project's smart contracts help DynaSets users benefit from instant execution of transactions in various liquidity pools simultaneously. The end user (investor) increases the efficiency of their investments due to lower fees with less chance of slippage in the trading system. And for this, you don't even need to register on the platform itself.
Probably, the most popular platform for DeFi is MakerDAO, which provides lending services based on decentralization. This is a project with extensive functionality, the main feature of which are smart contracts that allow you to get loans secured.
Thanks to it, users send Ethereum (ETH) cryptocurrency to a smart contract to issue their own liquid tokens. As a result, we have DAI stablecoins or coins secured with real money. MakerDAO will accept them as collateral. That is, the service acts as an ordinary intermediary: anyone can get money at a percentage for their own needs.
Among the alternative and no less well-known platforms in this area are InstaDApp, BlockFi and Compound. The last of these services makes it possible not only to borrow money, but also to earn on cryptocurrency deposits. BlockFi clients can obtain loans in digital assets using conventional lending mechanisms.
Harbour and Polymath projects can also be distinguished among the platforms of decentralized finance. They specialize in issuing digital shares in the form of tokens. Sites such as Uniswap or Bancor offer services for the profitable operational exchange of crypto assets. Augur service is focused on offering predictive scenarios for exchange rates of various tokens, and Melonport provides services for managing digital assets.
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