Written by Ethan Goldenberg
Financial expert @ Global Asset Finance Limited, 10+ years in the finance and cryptocurrency market
Recently, decentralized finance (DeFi) as a term has appeared in almost all channels of the crypto industry, and this is not surprising. This technology can change the paradigm of thinking of millions of people and opens up new opportunities for interacting with their assets.
The topic of decentralized finance is very extensive, so we will describe the main uses and risks of this technology.
First of all, it's worth noting that DeFi is not a specific technology, but rather a pool of software solutions.
We will consider the most interesting and promising of them below. In the meantime, let's agree that DeFi is a paradigm based on a service that provides financial services and complies with the principles of DeFi:
DeFi is powered by smart contract technologies and decentralized applications, or dApps, on top of the blockchain. The fact is that platforms like Ethereum allow developers to create complex algorithms for storing and managing digital assets, and all operations are carried out without intermediaries.
Decentralization of financial services is closely related to the concept of Web 3.0, which is the next stage in the development of the Internet. Along with the development of network technologies, user data ceased to belong to them, and the "security" of the Internet is regulated by a small group of well-known technology giants. Presumably, Web 3.0 should return the right of each user to their own privacy.
Blockchain and smart contract technologies can really compete with the traditional financial system. Over time, the development of new financial technologies will become even more simplified, and this in turn will lead to the explosive growth of DeFi platforms.
Tracking DeFi services is not easy because the industry is very fragmented. There are services that provide data for analysis on decentralized finance. For example, app.defisaver.com or mydefi.org.
The entire market is usually divided into several popular areas for working with finance:
Balancer / Uniswap - Decentralized exchanges for asset management and liquidity delivery. You can become a liquidity provider by putting a pair of assets in the pool and receive % of transactions within this pair.
It sounds cool, but the caveat is that you cannot control the ratio of one asset to another, so the main success factor here is the choice of the most relevant pair of assets, the purchase price of the assets, and the time for which you supply liquidity. As a rule, to earn some profit, you need to put liquidity in a pair for several months with a total amount of $1000.
Synthetix is a platform for working and trading synthetic assets. The platform offers entry to traditional markets directly with cryptocurrencies. Synthetix uses the native ERC20 token - SNX - as collateral to issue a synthetic asset. All assets are collateralized up to 800%, which means that each financial derivative is backed by significantly more assets.
To earn money, you can supply liquidity in SNX / SUSD / SETH tokens on DEX exchanges and receive a reward not only from the Synthetix pool, but also for the supply of liquidity on the Uniswap exchange.
Among the main market risks, one can single out a misunderstanding of the liquidity supply calculation system and the possibility of liquidating a pool with assets if the price of a token falls.
Compound Finance is an industry-leading lending protocol that allows users to lend and borrow popular cryptocurrencies such as Ether, Dai, and Tether. Users connect to Compound via web-3.0 wallets such as MetaMask, with all positions tracked using cTokens that generate interest income.
Many people use the service to obtain leverage and trade on exchanges, but we recommend lending funds and getting a stable percentage of profitability. By lending USDT or DAI, you get up to 8% per annum.
Curve Finance is another service that leverages pools of liquidity to provide highly efficient, stable trading and low-risk income for liquidity providers.
With Curve, users are not exposed to the risk of price slippage that they usually face on the DEX when exchanging one stablecoin for another.
Unlike Uniswap, Curve lends assets on Compound when they are not trading and lends this interest to liquidity providers.
YEarn Finance is a liquidity aggregator that provides an automated “profitability pharming” strategy using a range of loan pools. The most prominent protocol pool, yearn.finance, moves capital between lending protocols such as Compound, Aave, and dYdX - ultimately aimed at providing lenders with the best interest on deposits.
Now let's move on to the most interesting part and see how to farm profitability using free crypto assets and protocol bundles.
Required Platforms: Compound & InstaDapp
Note: By using the InstaDapp strategy, you have the option of being liquidated if your collateral falls below the collateral threshold. We recommend sticking to a 60% ratio when using this strategy.
Required Platforms: Ren Protocol, Curve, Synthetix, Balancer
When using multiple platforms, it turns out to earn on the supply of liquidity on the exchanges and receive additional bonuses for staking platform tokens.
This is all very tempting, especially for newcomers to the industry, but everyone should understand the following risks:
Error or hacking of a platform's smart contract with partial theft of funds from pools. Such incidents have already occurred, some platforms have compensated for losses, and some have not
Fees when interacting with contracts. For each transaction you will pay a certain fee. Taking into account the high hype, the cost of transactions on the Ether network can reach several dollars. Therefore, before you start, calculate whether you can recoup the cost of commissions.
Liquidation of positions in case of a sharp change in the value of an asset. Stay on the brink and keep an eye on securing your positions.
You do not always obtain liquid tokens. When there are too many tokens, the balance between buyers and sellers may shift not for the better and the cost of tokens may rapidly roll down.
There are no regulations, but in case of failures in a smart contract, no one will insure you, except for the founders of the platform
I hope the article will help you better understand the essence of this technology, write your questions and opinions in the comments, I am ready to answer questions.
Please note: purchasing or selling Cryptocurrency carry significant risk. Prices can fluctuate at any time.
Because of such fluctuations, Cryptocurrency may gain or lose value. This is your responsibility on how to handle your own assets.