or DeFi, for rookies
Are you crypto-curious but unsure of where to start, or have you found the information out there too overwhelming to digest? Then savour this visual guide, which can alleviate your FOMO by explaining everything you need to know about DeFi and how to use it to your benefit.
By Morning Studio editors
August 19, 2022
Whether or not you have embraced cryptocurrency, most of the world has accepted that it is no longer a short-lived tech trend. And within the crypto universe, DeFi – short for decentralised finance – is gaining significant attention.
While it might sound complex, DeFi is simply a different way of managing and investing money. But how can you actually tap into this system and start reaping its advantages? We break it down for you.
What are the main elements that make up DeFi, and what do each of them do?
Cryptocurrency is a digital or virtual currency powered by blockchain technology, with shared databases that store and verify information in a cryptographically secure way. Like flour in a cake, crypto is the very foundation of the DeFi ecosystem. It is within this ecosystem that users are able to transfer, trade, borrow or lend cryptocurrency. Fun fact: bitcoin is the first cryptocurrency, originally launched in 2009.
Staking is the process of locking up crypto assets for a fixed period of time in order to secure a blockchain network, with participants obtaining rewards or earning interest in return. In DeFi, the staked cryptocurrency is used to validate transactions on the blockchain, and returns for the staking participants, or validators, are purportedly higher than the interest rates typically offered by banks. Each time a block of data is added to the blockchain, new cryptocurrencies are minted and distributed as staking rewards to that block’s validator. In most cases, the staking reward is received in the blockchain’s native cryptocurrency.
Liquidity mining involves placing crypto assets into various liquidity pools on decentralised exchanges (DEX) to facilitate cryptocurrency trading. In return, participants receive tokens and fees, depending on the quantity of cryptocurrency that has been provided as liquidity and contributed to the pools. This practice is popular among crypto investors because it provides them a way to earn passive income.
In DeFi, lending starts with depositing cryptocurrency within the ecosystem to earn interest. It is similar to depositing funds in a savings account, whereby the bank takes that money and lends it out to others, and in return the account holder receives a portion of the interest earned from that lending. But one key difference is that DeFi lending enables investors to lend their own crypto holdings to borrowers in return for interest payments.
DeFi borrowing involves pledging digital assets – in this case, cryptocurrency – as collateral for a loan, akin to how a house is used as collateral for a mortgage from a traditional bank. This is a handy option when an investor has no intention of selling or trading their crypto holdings in the near future, as they can be used to quickly generate cash flow to put towards expenses.
Now that you know what DeFi can do, how can you get started?
Get a crypto wallet, or sign up with a crypto provider
A crypto wallet is an essential tool for storing, buying, trading and selling cryptocurrencies. It can also store digital collectibles like non-fungible tokens (NFTs) that you might want to buy, sell, trade or transfer.
Buy or deposit digital coins into your crypto wallet
The leading cryptocurrencies are bitcoin (BTC) and ether (ETH); they are available on most crypto-exchanges. Some of the larger crypto-exchanges offer upwards of 50 different coins, but experts recommend sticking with the two most popular and established cryptocurrencies, or DeFi coins such as DeFiChain (DFI).
Invest your cryptocurrency into reward-generating products
Once you have digital coins in your crypto wallet, do not just let them sit there, doing nothing. Instead, get these coins to work for you by investing them. Platforms such as Cake DeFi allow you to generate rewards twice a day via cash flow-generating products.
Still unsure? Take heed of these tips from the crypto veterans at Cake DeFi, all of which have been expertly tried and tested.
“Never put all your eggs into one basket.”
– Ying Zhong Ng, vice-president of product
There are thousands of digital tokens in the roughly trillion-dollar cryptocurrency market, Bloomberg reported in March, and their values tend to be volatile. Creating a diversified portfolio of cryptocurrencies is key.
“Always invest money with platforms that have a clear track record.”
– Julian Hosp, co-founder and CEO
To minimise the risk associated with DeFi, do your own research first. Look into the team behind the application, its transparency and compliance with regulatory or audit bodies.
“Never invest more money than you are willing to lose.”
– U-Zyn Chua, co-founder and chief technology officer
This certainly applies to any type of investment, but is especially important when it comes to DeFi, where you can run the risk of getting carried away by the prospect of high returns that go beyond what traditional banks can typically deliver.
This “new recipe” for DeFi essentially serves up an alternative to traditional finance, also known as TradFi. In TradFi, financial functions need to be conducted through intermediaries like banks or brokerages. DeFi, on the other hand, provides the services and functions of TradFi, but the middlemen have been replaced by software.
As a result, some reports have pointed out that crypto users are building their own version of Wall Street, without much of the red tape and regulations that have come to govern TradFi. By empowering everyday people via peer-to-peer exchanges, DeFi is making equal opportunity banking a real possibility.