What is DeFi?
DeFi or decentralized finance stand for financial applications and services that use smart contracts. DeFi is a decentralized, open-source, and trustless ecosystem of financial applications and services based on various blockchains. The main goal of DeFi is to replace traditional bank systems and use open-sourced protocols for interaction with financial systems. Simply put, this is used to provide access to a bigger amount of people and let them participate in the decentralized deposit and credit services.
The DeFi ecosystem covers all aspects of financial services and transactions, including lending, borrowing, and trading within decentralized structures. Anyone who has a connection to the Internet can interact with such an ecosystem and manage assets through peer-to-peer (P2P) and decentralized applications (dApps).
It is a trustless and permissionless system that lets users directly interact with one another without intermediaries. Trustless systems are also much more reliable because the activities in such systems are regulated with smart contracts themselves.
Why is this concept so promising?
You may check the advantages of DeFi systems to get a clearer picture of what the DeFi is:
- Decentralization and self-government: the decentralization itself is a great advantage. The control over the system is distributed between players. The transactions are transparent, there are no players/mediators that take a piece of your cake when sharing the profit as it works with the traditional banks. The absence of middlemen from transactions is one of the most important features of DeFi.
- Transparency: the DeFi applications are open-sourced, which allows anyone to see how the contract works and find bugs if there are some.
- Inclusiveness: anyone can create and use an app. Users can interact directly with the smart contracts through wallets, there are no controllers.
- Interoperability: new DeFi applications can be created by combining other DeFi products (stablecoins, decentralized exchanges, prediction markets, etc.).
What are the potential dangers of DeFi?
The pros of using a DeFi application are undeniable, but there are some serious drawbacks to be considered. No form of investment is completely safe except dapps, as blockchain-based protocols bring some unique hazards.
For example, a significant risk of DeFi applications is that many offer loans that come with exceptionally high collateral requirements and oppressive conditions associated with, such as full settlement, with the loss of all your capital if the price of the currency in which you provided your capital falls below a certain limit.
In addition, the loss of your private key or password, even a typo when writing down the address of your crypto portfolio, may mean that your funds will be lost forever.
So of course, there is the obscure regulatory status of DeFi applications. As governments around the world are still evolving their response to this emerging asset class, the future is uncertain and protections are minimal.
Last but not least is the fact that, unlike traditional systems, smart contracts are particularly vulnerable to certain types of hacks. In the first months of 2020, DeFi applications were successfully attacked on at least five separate occasions, leading to substantial losses.
How to be in trend with Defi?
Currently, the DeFi segment is estimated at approximately $4 billion, which is about 1.5% of the total capitalization of the crypto market. DeFi capitalization is calculated by adding up the amount of funds stored in smart contracts and the value of tokens that give control.
It is possible to track the state of the market by means of several services:
- defipulse.com - statistics of blocked funds in protocols.
- defimarketcap.io - market capitalization of tokens involved in DeFi.
- defiprime.com - interest rate statistics.
- defiscore.io - DeFi projects risk assessment.
- dappradar.com - information about decentralized applications.
What is yield farming?
Practically, by ‘yield farming’ or ‘liquidity mining’ we understand any action holders do to receive rewards-putting crypto assets to work (basically just staking or locking up cryptocurrencies) and generating returns on those assets. Simply put, yield farming is when you make more crypto with your crypto.
The simplest case for understanding yield farming is Uniswap. In this protocol that acts as a decentralized exchange, users can swap tokens for others in exchange for a 0.3% commission. This is possible because there are some depositors who act as liquidity providers for the system and in return generate a yield through the fees collected. We see clearly how we are putting our money to work. It should also be said that some people do not see Uniswap as a form of yield farming, because you deposit your assets in pools with a 50% ratio between two tokens (e.g. Pool ETH-DAI = 50% ETH - 50% DAI) in order to be able to offer swaps, this can vary the ratio between the two tokens depending on the variation in their prices and the swaps demanded. That is if the price of ETH rises you will accumulate more DAI, and if the swaps demand more Ether, you will accumulate more DAI as well; your proportional balance between the two tokens may vary. Therefore, despite obtaining performance, you lose the position in some tokens that you may want to keep in the long term.
Two other typical protocols for the yield farming concept are lending platforms like Compound or Aave. The first one generates yield through interest and incentives, and in the case of Aave only through interest.
Curve, a protocol of Swaps between stable coins (as they are stable currencies you do not lose the position in any asset) is also a reference in the concept of yield farming.
One thing to be clear is that these interests generated by your assets are often confusing. The protocols are decentralized, which means that remunerations and incentives are given and rebalanced by the market, which can cause sudden changes in yields due to falls in the price of assets or the lack of liquidity of the protocol. That is why a financial and investment analysis must be done often, in order to update the data on the possible annual return of your assets. Because of this, the most commonly used assets in these protocols are usually stable coins, which allow you to trade regardless of the volatility of the crypto assets.
In short, yield farming consists of generating returns on your assets without having to buy or lose positions in them. Basically, it is putting your money to work. In yield farming, the returns can come through fees collected in the protocol, through generated interest, or through an incentive system by which you receive tokens of governance of the protocol (Compound or Balancer), and this is what is called liquidity mining.
How to yield farm popular tokens?
To start earning rewards, you have to supply the token to the protocol. After some time you can send the tokens to your wallet with the accrued interest.
Uniswap – UNI
Uniswap is the leading decentralized exchange in DeFi. In mid-September, Uniswap airdropped 15% of its supply to past users through a program marked ‘UNIversal Basic Income‘. Today, UNI can be earned by providing liquidity to selected pools and will eventually be used for governance as a larger portion of the supply is issued.
We have prepared a tutorial on how to make a deposit to the platform. You can read in more detail in our Guarda Academy.
- You will have to choose a compatible wallet, and send funds stored in Guarda to it.
- Then we’re clicking the Deposit button on the specified pair chosen by you.
- Then, you get into a tab asking you to deposit liquidity into a specified pair.
- After that, you will get to the currency pair window, where you have the percentage of ownership in the pool for the amount of investments.
- Once you add a certain amount, you get your UNI tokens.
- We should move back to the specified pair page. and click on the Deposit UNI V-2 LP Tokens.
- Once you have confirmed your deposit, you'd start earning UNI tokens as a liquidity provider!
Here is a full guide on how to farm Uniswap tokens: How to earn UNI
Compound – COMP
As the native governance token behind the leading lending protocol, COMP is earned by users for lending or borrowing assets. COMP is used to govern important protocol decisions that can be voted or delegated on the Compound Governance Dashboard.
COMP is allocated to markets relative to the amount of interest accrued, meaning assets that generate the most interest will earn the most COMP per day.
We have prepared a small tutorial on how to make a deposit to the platform. You can read more in detail in our Guarda Academy.
- So, we’ll start, perhaps, with the most fundamental part — buying ERC-20 tokens.
- Once you have purchased ERC-20 tokens, you need to tie your wallet with Compound Finance. In order to do this, you need to go to Compound Finance website, and on the main screen click on the App button.
- The next step is about the connection to the wallet.
- After the connection, a panel opens with a list of available cryptocurrencies, their balances, and interest rates on Supply and Borrow.
Then, in the control panel, you need to select which cryptocurrency to put (deposit) on the platform. Compound rewards its users both for providing assets for credit (Supply) and for obtaining credits (Borrow). To get the most out of it, users take both sides of the deal. They make a deposit, take out a loan, and deposit it again.
Yearn.Finance - YFI
Yearn.Finance has become one of the most popular players in the DeFi ecosystem. It is a yield aggregator that provides automated growing strategies for farmers and liquidity providers.
We have prepared a tutorial on how to make a deposit to the platform. You can read more in detail in our Guarda Academy.
- Firstly, we have to get ERC-20 tokens.
- The next one is to go to yearn.finance website, where you're gonna see such a panel with 6 categories. More detailed you can read about this in the Guarda Academy.
- Once you have purchased ERC-20 tokens, you need to tie your wallet with Yearn Finance. In order to do this, you need to go to the Yearn Finance website, and after choosing the Vaults category, connect a compatible wallet to the app.
- The next step is about moving to the “Earn” category.
- When your wallet is connected, you can deposit any type of these stable coins. Yearn will get you the highest yields for your coins by shifting your coins between popular pools.
- As for now, we’re returning back to the “Earn” page and looking for a token to deposit in.
- Once you have made a deposit, Yearn (algorithmically) will allocate your investment into one of three pools.
- On the same principle as in all other pools, you get tokens back, which correspond to your degree of ownership.
Synthetix – SNX
Synthetix is a leading derivatives protocol backed by a native token SNX. In order to mint new derivatives – called Synths – users must stake at least 750% of the Synths value in SNX. Maintaining this ratio – referred to as a cRatio – allows users to earn native inflation along with a pro-rata portion of trading fees from the Synthetix Exchange.
- As always, our first step is to get sUSD tokens in Guarda.
- Then, we go to Mintr Synthetix where we choose a compatible wallet.
- After that, we open a deposit tab where you can place sUSD in a sales queue for ETH on Synthetix.Exchange.
- Then you burn sUSD to get SNX.
Akropolis – ADEL
Akropolis laid a blueprint for the rollout of a governance token specifically for its yield farming product – Delphi. The token can only be earned through liquidity mining using the protocol token – AKRO – or stablecoins and supporting collateral.
- Get DAI tokens in Guarda Wallet, and open the Akropolis platform.
- The next step to click on the App button.
- There we press the Connect button and select the compatible wallet.
- For now, we have an option of Liquidity Provision where we click on the button: “Become Liquidity Provider”
- In this window, you enter the number of DAI you want to deposit and press Submit.
- You're a liquidity provider!