In my previous cryptocurrency post, I discussed some of the basics of blockchain and cryptocurrency in general. Today I want to talk about DeFi, or decentralized finance. These are terms that you may have seen or heard in the news these past few months. So what is DeFi?
Disclosure: Trading and investing in cryptocurrency carries some risks. I am not a trained or licensed financial advisor. I’m relating my experiences and sharing resources I personally have found useful. I will try to explain some of the risks, but you are encouraged to perform due diligence on any potential investment. Some of these resources are affiliate or referral links which will reward or pay me if you make a purchase or complete certain required steps. Many of these companies will reward you as well for signing up. Terms & Conditions of offers set by advertisers.
Ultimately the promise of cryptocurrency is universal access to money and payments, for anyone in anyplace in the world. Decentralized finance seeks to further that promise by making every financial service you currently use obsolete. By providing open global alternatives to savings, loans, trading, insurance and other financial services, DeFi seeks to make finance accessible to anyone in the world with a smartphone and an internet connection.
DeFi uses dapps(decentralized apps) to manage smart contracts. These smart contracts are triggered and take effect when certain conditions are met. Anybody can build a dapp that will automatically execute the functions of just about any contract that can be imagined.
What Differentiates DeFi Dapps from Traditional Bank or Wall Street Counterparts?
This section quoted from: A Beginner’s Guide to Decentralized Finance (DeFi) by Sid Coelho-Prabhu on the Coinbase Blog. I recommend reading it if you’re interested in learning more.
- At their core, the operations of these businesses are not managed by an institution and its employees — instead the rules are written in code (or smart contract, as mentioned above). Once the smart contract is deployed to the blockchain, DeFi dapps can run themselves with little to no human intervention (although in practice developers often do maintain the dapps with upgrades or bug fixes).
- The code is transparent on the blockchain for anyone to audit. This builds a different kind of trust with users, because anyone has the opportunity to understand the contract’s functionality or find bugs. All transaction activity is also public for anyone to view. While this may raise privacy questions, transactions are pseudonymous by default, i.e. not tied directly to your real-life identity.
- Dapps are designed to be global from day one – Whether you’re in Texas or Tanzania, you have access to the same DeFi services and networks. Of course, local regulations apply but, technically speaking, Most Defi apps are available to anyone with an internet connection.
- “Permissionless” to create, “permissionless” to participate — anyone can create DeFi apps, and anyone can use them. Unlike finance today, there are no gatekeepers or accounts with lengthy forms. Users interact directly with the smart contracts from their crypto wallets.
- Flexible user experience — don’t like the interface to a certain dapp? No problem — you can use a third party interface, or build your own. Smart contracts are like an open API that anyone can build an app for.
- Interoperable — new DeFi applications can be built or composed by combining other DeFi products like Lego pieces — e.g. stablecoins, decentralized exchanges, and prediction markets can be combined to form entirely new products.
Building My Hoard
As of this writing, there is 13.57 billion dollars currently locked in DeFi contracts. DeFi is currently the fastest growing sector in cryptocurrency. Because of this, There are some pitfalls I have found as a new user with only a small amount to invest.
Every so often Coinbase* offers the opportunity to learn about new cryptocurrencies or blockchain networks. Generally you have to watch a short video and answer a one question quiz to earn a few dollars worth of the featured crypto. I used these rewards to partially fund my first foray into DeFi, with the Compound Protocol.
*Referral link. The Coinbase offer above pays you $10 worth Bitcoin when you open a Coinbase Acct and buy or sell $100 worth of cryptocurrency. I will receive $10 BTC as well. Coinbase sets the terms of this offer.
I access the Compound dapp from my Coinbase wallet. The user interface is a bit clunky to use and user documentation is hard to find. However the concept is great. When you lock crypto into the protocol, you are given a compound version of that token to hold in your wallet. You also start earning Comp as the interest for you’re locked in assets. Comp also gives you voting rights to changes in the protocol, such as new coins to add, or adjusting interest rates. Further you can borrow against your locked in crypto to further grow your portfolio.
The one problem I have with Compound is not even with it. The problem is that it runs on the Ethereum network which collects Gas or the fee paid to the miners verifying transactions on the network. Fees are based on how busy the network is. Because of the numerous tokens based and running on the Ethereum network, and the large volume of DeFi transactions, Gas fees have become prohibitive for users with smaller transactions. I don’t mind paying small network fees, but I can’t pay ten dollars to move five dollars. So until the Ethereum network figures that out, I’ll stick to something else.
Which brings me to BlockFi
DeFi applications are numerous and complex. I read about some in the crypto news feeds. I’ve looked at others in their dapps, but decided against them. However, I did find BlockFi which is easy enough to use. BlockFi receives good reviews, and who’s going to turn down a decent sign up bonus.
I opened my BlockFi account in September. The value of my deposits was approximately $270 at the time I made the deposits. Bitcoin has appreciated nicely in value since then. I received a $10 bonus for depositing $100 BTC when I opened my account. I earn 6% APY on my Bitcoin, and 8.6% APY on my US Dollar Coin (USDC). BlockFi pays interest which compounds monthly in the cryptocurrency of my choice. There are currently seven popular currencies to choose from.
Further You can borrow while using your deposited crypto as collateral. The advantage in this is being able to access funding without the tax implications of actually selling your crypto. I don’t borrow at this time, but you never know. Currently if I need these funds, I have to withdraw, transfer, and sell them.
Essentially BlockFi is my rainy day fund and my savings account, and it works harder for me than any bank account I’ve ever had.
Want to Try DeFi Yourself? Take $100 & These Steps to Earn $25 in Bonuses
- Starting with the Coinbase offer earlier in this article, set up a Coinbase account and purchase $100 worth of cryptocurrency. If you can stomach volatility, Bitcoin can offer great growth potential. For less risk, I like US Dollar Coin (USDC). It’s a stable coin whose value is closely tied to the US dollar. I’ll use USDC for the rest of this example.
- Next, click the link below to open a BlockFi account.
- After collecting the $10 bonus from Coinbase, transfer your USDC (or other crypto) from your Coinbase portfolio to your BlockFi wallet. (Important: Make sure you use the correct wallet address for transferring your crypto)
- That’s it. You’ll have to leave your balance of crypto untouched for a short period of time to collect the BlockFi bonus. And you’ll start accruing interest immediately. You can further fund your BlockFi account directly or from another wallet to increase your sign up bonus. See offer page for details.
Using the $100 in example, the Coinbase offer will earn you $10, then by transferring all of that to BlockFi, you will earn $15 based on current bonus tiers. Easy $25 for you, and a small commission for me. There may be some small network fees, but not problematic as I described with Ethereum network fees.
Questions, comments, smart remarks? Post in the comments below. Let me know if you have taken the leap into DeFi.
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