What is DeFi
Decentralized Finance (DeFi) is an application for disrupting and decentralizing finance built on blockchains. Through DeFi, people can take control of the services usually provided by centralized finance and become more flexible.
Let’s talk a little about why you should pay attention to it now that we have the definition out of the way.
What is DeFi and why is it important:
1) DeFi is a rewarding experience.
There are many protocols that will airdrop tokens to participants in their protocol or to early adopters of their services. The ENS airdrop is one of the most recent and popular ones. ENS stands for Ethereum Name Service and is a way to register a domain on the Ethereum network. Recent domain registrations received an airdrop worth quite a bit of money. It has been reported that some people have received as much as $50k for simply registering a domain.
Another example is someone who deposited $100 into dYdX (a trading platform) and received an airdrop that he then sold for $54k. This is a pretty good return just for depositing $100 and trading a few times.
What kind of airdrops will there be in the future? You never know, but it doesn’t hurt to learn more about the solar system.
2) DeFi allows you more control and flexibility over your finances.
I recently got a small bonus at work that I planned to use to pay off my credit cards, but I came across a post where someone described leveraging their assets to pay off some loans they have in CeFi (centralized finance). I thought this was extremely interesting and decided to try it out. To pay off my credit card debts, I deposited my money into AAVE, on the avalanche network. What is the point of taking out a loan to pay off another loan? Interesting question. When you deposit into AAVE’s protocol, they pay you interest.
Additionally, when you take out a loan, they pay you interest. Using the AAVE protocol on the avalanche network entitles me to bonus rewards. My current interest rate is greater than what I have to pay on a loan that I took out. Consequently, the loan will essentially pay for itself as long as this is the case. Also, there are no term or monthly payments, so as long as I keep my loan health in a good state, I can pay as I see fit.
I’m also paying off my cards while my crypto keeps growing. As a result, I was able to become my own bank and lend to myself with extreme flexibility. I will make a follow-up post explaining how this works as well as the risks in more detail if there is interest).
3) You gain a better understanding of how L2 (Layer 2) solutions work.
I would simply buy BTC and ETH up until I learned about the Defi space (which is still smart and I still do), but I would hear people talk about L2 on Ethereum all the time and I had no idea what they were talking about. I found it very difficult to navigate through the DeFi space and it felt very inaccessible.
As I’ve delved deeper into DeFi, however, I’ve learned more about Layer 2 and how it works and why people like it so much (Low fees anyone?). My understanding of crypto and the space in general has deepened. I have made money and been able to learn while being hands-on. In addition, I learned that DeFi is not as risky as it is made out to be (although there are definitely some very risky plays to be made).
TL;DR: DeFi can seem intimidating at first, but it’s definitely worth learning more about it. There is something for everyone, whether it is a crazy airdrop for joining a new protocol or paying off some debt without selling your crypto.