DeFi Protocols and How to Invest in them.
Blockchain technology has changed a lot. It has changed the way we send money, the way we buy art, the way we invest in assets, etc.
Apparently, it has also changed the way banking is done
The banking system, as we know it, has always been handled and governed by traditional financial giants and institutions.
However, within the blockchain, banking activities, are governed by code. This code system of governance is nicknamed decentralized finance.
The purpose of this article is to
1. Give a breakdown of what decentralized finance is.
2. Reveal its potential as an investment
3. Describe how to interact with decentralized finance protocols.
Please note: Decentralized Finance is often stylized as DeFi
What is Decentralized Finance?
DeFi is a tool that offers financial instruments without depending on banks. These financial instruments include loans, savings accounts, etc.
Decentralized apps communicate with decentralized finance protocols. The user base of the DeFi infrastructures has grown exponentially over the past few years.
Decentralized finance is becoming more and more critical because keeping money in banks is becoming more and more expensive.
In other words, DeFi reduces the amount you pay in order to use financial services.
With DeFi, one can save up to 80% of service expenses by leveraging the blockchain to settle transactions.
This reduction in the cost of making complex transactions increases financial innovation and flexibility in asset management.
Currently, over $50 billion is locked in Decentralized Financial Protocols. The total value locked went as high as $150 billion in 2021.
What are the most popular DeFi Protocols
The most popular DeFi protocols include:
Aave
Ave is a prominent and well-known lending mechanism in the DeFi market. The native token AAVE allows users to participate in the protocol’s governance and secure it.
Uniswap
UniSwap is also one of the most popular DeFi protocols nowadays. Users can earn UNI, the native cryptocurrency, by providing liquidity to specific pools.
Compound
Users can use this protocol to gain access to a native token called COMP, which can be earned by lending or borrowing assets. COMP’s Compound Governance Dashboard assists with the governance of critical protocol decisions, providing vote and delegation flexibility.
Ways to Invest in DeFi
If you wish to get a feel of DeFi, there are numerous ways you can go about it. Some of them include…
- Buying a DeFi-related cryptocurrency
- Staking your cryptocurrency asset to earn other tokens
- Yield Farming
- Providing liquidity in decentralized exchanges.
Step-by-Step: How to invest in DeFi
- Get a wallet
Your crypto wallet is a digital entity that stores the cryptocurrencies you’ll use to engage in DeFi protocols. One of the simplest wallets to use is metamask. MetaMask is a popular choice since it provides access to decentralized exchanges where you can trade DeFi coins and use DeFi protocols.
- Purchase Cryptocurrency
To interact with DeFi protocols, you need cryptocurrencies, just like you need cash to invest in equities.
You can buy cryptocurrency on exchanges like Binance and FTX.
When purchasing cryptocurrencies for use with DeFi protocols, you must first purchase the native token of the blockchain with which you are interacting.
- Dive into the Protocols
There are protocols in place that allow investors to lend cryptocurrency, trade cryptocurrency, stake (or lock up) cryptocurrency for a return, and participate in liquidity pools.
When trades are made in your liquidity pools, you will earn some money as a reward for contributing to the pool.
You can also engage in yield farming, in which your involvement in a loan yields you interest and more.
DeFi Protocols you can participate in include: pancakeswap, MakerDao, Uniswap, Aave, Compound, etc.
Conclusion
Decentralized Finance has proven time and time again that it is here to stay.
As more and more people invest and desire to have control over their assets, DeFi protocols have been shown to provide a robust set of tools for management of fiat and digital assets.
Read this post and more on my Typeshare Social Blog
