DeFi: How to Make Your Coins Work for You

04 Sep, 2020

You have to be hiding under a rock not to have heard the news about DeFi (Decentralized Finance) and the heightened interest in crypto lending and borrowing.  While the digital coin news is dominated by the price of Bitcoin, another story that’s gaining attention is the DeFi market explosion.

Lending? Borrowing? Earning Interest?  Sound more like traditional fiat financial terms.  But that’s the beauty of what’s happening in the cryptocurrency space. These simple concepts that consumers readily understand are hard at work in the digital sphere with one significant difference:  rather than a third-party managing the transaction, it’s completed with a digital smart contract you create and recorded on the blockchain.

"The simplest way to describe DeFi is as an open financial network, Peter Johnson, of Jump Capital said in a recent interview with Fortune. “If you want to send, lend or borrow money you don't need to join a private network like PayPal or Fedwire or a bank."

If you’re thinking of lending your DeFi coins or borrowing from someone else, here’s a brief overview of some of the platforms and coins that provide quick, easy and secure means of putting your coins to work for you:

Maker – Without a doubt, MakerDAO (MKR) is a driving force in the DeFi sector. Multi-collateral Dai (MCD), which was launched in 2019, gives you the opportunity to earn interest on your coins with no minimums or fees. You can withdraw your coins at any time without a penalty. When’s the last time your traditional bank offered that type of flexibility?

Coin holders who want to earn interest deposit MCD into the Dai Savings Rate (DSR) smart contract. Coins can also be lent or borrowed on Maker’s Oasis platform.  The only fees for use are gas required to complete the transaction and Maker’s variable-rate stability fee.

Aave - Aave is an open Source, non-custodial protocol that allows you to earn interest on deposits and borrow assets.

Aave’s interest-bearing “aTokens” offer opportunity to earn interest directly into your crypto wallet.  “When someone deposits an asset, a smart contract mints an equivalent amount of aTokens, which are then distributed to and held by the lender, explains Stani Kulechov, founder and CEO of Aave. “if you deposit 100 Dai, you will get 100 Dai. These aTokens can be freely stored, transferred, and traded. While the underlying asset is loaned out to borrowers, aTokens earn interest directly into whatever wallet you’re using (Metamask, Coinbase, etc.)! You can redirect the interest earned on aTokens at any time to any Ethereum public address, which gives you tons of control over where your money goes.”

More experienced traders might opt for an Aave “Flash Loan” which let users borrow instantly without any collateral. Flash loans are a “huge opportunity for arbitrage,” Kulechov notes.

Compound - Compound is an algorithmic, autonomous interest rate protocol that lets you earn interest or borrow assets. Users can deposit supported coins into a Compound smart contract where it earns interest generated when other users borrow coins. Interest is tied to market demand.

Interest in Compound grew even stronger this summer when its COMP governance token was launched. The coin has been extremely successful as traders snapped up the coin in what is termed “yield farming.”

“While Compound is rarely the most remunerative yield farming protocol, it has been the most stable and high volume source of yield, largely due to its relatively steep distribution curve and high market capitalization, reports Cointelegraph’s Andrey Shevchenko on August 26. “Current base yields amount to about 8% APY, which can be approximately tripled by entering a leveraged DAI position.”

USDC – If you’re looking for a no-brainer and just want to put your coins where they can earn interest, USD-backed USDC offers returns on cash starting at 3%.

“After DAI, USDC is the most lent and borrowed stablecoin on the Compound protocol and it is also the most borrowed stablecoin in Aave,” Cointelegraph reports. “Flipside Crypto has also noted a clear pattern in the flow of newly minted USDC, most of which go through Coinbase and are then sent to the largest DeFi platforms.”

When it comes to digital coins, there’s no right or wrong answer in how you chose to use them. But clearly, with more than $9 Billion in DeFi coins locked in smart contracts, smart traders are making their assets work for them.

“Money should never sleep– we have to bring those people to DeFi and show them that there’s loads of cool ways to control your money and make it work for you,”  Aave’s Kulechov said. “People value transparency and being able to make the most of their money.”

Joyce Pavia Hanson
Contributor

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