Decentralized Finance

Decentralized finance is a set of web3 technologies that replace other financial tools provided by traditional banks. A rallying cry of the technology is that you can "become the bank."

Contrast with "TradFi" (traditional finance) or sometimes "CeFi" (centralized finance)

DeFi is a useful tool for generating additional income from cryptocurrency.

One type of DeFi application is a Decentralized Exchange, or DEX. A Dex allows you to exchange one cryptocurrency for another, while paying fewer fees. You can also lend coins to a DEX in exchange for capturing some of said fee. This practice is known as liquidity pooling.

Examples of DeFi Models

Private Lending and Borrowing - You can lend and borrow assets. Often times you can borrow back the assets you lend with a 50% collateralization. For example, lending 10 ETH and borrowing 5 ETH.

Liquidity Pooling - You lend pairs of coins to a DEX in exchange for collecting a fee. The fee is listed in terms of APY, although these rates have an incredibly high variance. Typically you lend pairs that are 1:1 in value.

Yield Farming - sometimes exchanges will incentivize users to add tokens to certain liquidity pairs, and will pay additional tokens for it. staking these positions is called "yield farming"

Autocompounding - yields from yield farming are paid out. Autocompounding services re-invest your yields automatically for you.

Risks of DeFi

Platform risk - there is always a chance the lending platform or dex you are using could do something nefarious, stupid, or cease to exist. You could lose your tokens in that case.

Platform coin risk - many platforms mint their own coins. These coins may not be liquid and have the market value they claim, thus losing value and going to zero. Those high APY yields you thought your were getting were fake.

Hacking risk - someone could gain access to your wallet, or could send you a nefarious NFT and steal your coins.

Impermanent Loss

DeFi Sites