There are a lot of crypto related buzzwords around at the moment, and one of them is DeFi. If you’ve not get your head around the whole blockchain or Bitcoin tech, don’t worry – this one is quite simple.
And the great thing about DeFi is it can be a really simple stepping stone into the world of investing in your future.
But what is DeFi? And is it something you really need in your life right now? (Spoiler alert: Definitely).
What is DeFi?
Defi stands for decentralized finance. What this effectively means that your money is stored in a non-centralised location. What does this mean?
A bank is centralised. They have access to your funds and if they go bankrupt, the local currency collapses or other circumstances change, your money can become either unaccessible or just disappear.
With decentralised finance, your money is stored on a public ledger, known as a blockchain.
This means that your money is not accessible to anyone else, except you. The bank can’t touch it, the government can’t touch it and theoretically, no-one else can touch it. Of course this depends on how secure your account is… Which we’ll look at in more detail shortly.
So now you know what is DeFi, we can look at how to use it….
Defi vs the bank
Decentralised finance platforms have been springing up everywhere – with many of them offering some fantastic offers to get you to invest. And this is how defi platforms have been able to tempt users away from the banks.
Many defi platforms offer interest rates far beyond what any bank can offer. Here in the UK, banks are offering annual savings rates between 0.5% to 2.5%. Pretty underwhelming, whatever your savings level.
The defi platforms offer very eye-catching rates, up to around 20% per annum.
So if you put $10,000 in the bank, you’ll take back a maximum of $250 if you leave it for the year.
With defi, with that same $10,000, you could be taking back $2000.
We should point out that there are a lot of different defi platforms, and if you’re trying to weigh up defi vs the banks, there are benefits for both sides. There are risks to consider before you take the plunge into defi, and abandon your current account forever.
How does defi work?
Defi operates on a similar model to traditional banks, but with a big difference. While your money in the bank is lent out to borrowers, and the bank then pays you a (very small) percentage of the profits back, with defi money is leant on the blockchain.
This means there are less fees, less regulations and less overheads.
While this means your investment returns are much higher with Defi, the risk is also higher.
With a bank, you have the security that you can walk into a branch, or contact customer service, and ask for your money any time you need it. You also have a bank card so you can draw your money from an ATM if you want.
With Defi, it’s less straightforward.
If you lose your login details, or someone else gets access to your account, you don’t necessarily get much in the way of support.
However, this is changing and there is a new wave of DeFi platforms that offer some great benefits, have your investments covered in case of theft and even issue bank cards.
Examples of DeFi platforms
The defi platforms that you might have heard of include:
- Curve Finance (curve.fi)
- Compound (Compound.finance)
- Cake (Cakedefi.com)
This is just a small selection of the many defi platforms out there (here’s a more comprehensive list).
Many of the decentralised finance platforms are exchanges where you deposit your money in the form of crypto currency, often their native exchange token.
For example, if you use AAVE, you’ll need to visit their platform (AAVE.com), connect a crypto wallet such as Metamask and add your crypto to their exchange. From then, you can ‘stake’ or earn interest, borrow money based on the amount of money you have staked and earn interest in the staked coin.
Cake also offers very high staking rewards (some in the multiple hundreds of percent), also also crypto tokenizes some popular stocks too. But again, this is a high risk staking option, requiring a crypto wallet and cryptocurrency to stake.
Of course as crypto is relatively volatile, by earning interest in crypto your final profits might be less than if you had just earned the lower percentage in your local currency. This is a risk you need to weigh up.
But newer platforms like Nexo and Amon offer another level of security to your defi investments.
The benefits of these platforms is that they allow you to earn interest not just on your crypto holdings, but also your fiat currency such as US Dollars, Euros and GB Pounds.
If you’re looking for an easy to use defi platform, Nexo is super simple. No connecting wallets, no need to have crypto coins that you might not be happy to hold for a year.
Nexo allows you to invest USD, GBP, EUR and an assortment of stablecoins (the crypto version of ‘real money’) for a return of up to 12% PA.
If you do hold popular coins such as Bitcoin, Litecoin, Cardano or Polygon, you can also stake these to earn interest up to 8%. In fact, Nexo occasionally offers exceptional staking rewards…. I am currently staking Polkadot (DOT) for a 17% interest reward, and they’re currently offering 20% reward for AVAX and MATIC.
Have a look at Nexo here. – This is a link with my personal referral code, so if you sign up here you’ll earn $25 worth of Bitcoin (so long as you deposit $100).
Some other benefits of Nexo are that they are going to offer a bank card linked to your account soon.
Offering up to 12% on crypto holdings, Amon might be the best bet for those holding crypto such as Bitcoin or Ethereum long term.
They do also offer interest on your fiat currency holdings and stablecoins too.
Another benefit to Amon is that their card is already available (Nexo’s Visa card has been ‘coming soon’ for a while now).
Check out Amon here – this is an affiliate link meaning we earn a small commission at no extra cost to you.
The risks of defi
As we’ve mentioned, crypto can be volatile which can mean holding it on a defi platform might result in negative interest. But, if you believe in the future of decentralised finance and crypto, like we do, then you’ll think that there is potential here that your bank just can’t match.
You should always do you own research with financial products and never invest more than you can afford to lose.
Read more about crypto on Global Playboy.