What is DeFi and why you should pay attention to it

Share:

Decentralized Finance (DeFi) is a term to describe applications built on blockchains to disrupt and decentralize finance. DeFi gives people the power to take more control of the services generally provided in centralized finance and creates extreme flexibility.

Now that we have the definition out of the way we can talk a bit about why you should pay attention to it.

Ill start with probably the most important reason for most folks:

1) It pays to participate in DeFi.

Many protocols will airdrop tokens to folks who participate in their protocol or are early adopters of their services. One of the most recent and popular ones has been the ENS airdrop. For those that don’t know ENS is the Etheruem Name Service and it’s simply a way to register a domain on the Ethereum network. People who registered domains recently received an airdrop worth quite a bit of money. Some people have received $50k+ from the airdrop for simply registering a domain.

There’s another example of someone who reposted $100 into dYdX (a trading platform) and received an airdrop which he then sold for $54k. That’s quite the return for just depositing $100 and making a few trades.

Will all airdrops be of this magnitude? Probably not, but you never know and it can’t hurt to learn more about the space.

2) DeFi can you give more control/flexibility of your finances.

I recently got a small bonus at work that I planned on paying off my credit cards with until I came across a post where someone described leveraging their assets to pay off some loans they have in CeFi (centralized finance). I found this to be extremely interesting and decided to give it a shot. I deposited my money into AAVE, on the avalanche network, and took out a loan against it to pay my credit card debts. You may be wondering why take out a loan to pay off another loan? Great question. AAVE pays you interest for depositing into their protocol and they also pay you for taking out a loan. By using the avalanche network I get bonus rewards for using the AAVE protocol on their network. Currently the interest I am getting paid is greater than the interest that I have to pay on the loan I took out. As long as this is the case, the loan essentially pays for itself. There is also no term or monthly payment, so as long as I keep my loan health in a safe state I have the flexibility to pay as I see fit. Meanwhile, my crypto is continuing to grow and my credit cards got paid off. I basically was able to become my own bank and lend to myself with extreme flexibility. (If there is interest on how this works I’ll make a follow up post explaining this including the risks in more detail).

3) You get a better understanding of L2 (Layer 2) solutions and how they work.

Previously to learning about the Defi space I simply would buy BTC and ETH (which IMO is still smart and I still do) but I would hear folks talk about L2 on Eth all the time and I never knew what they were talking about. The DeFi space seemed very difficult to navigate and felt very inaccessible. However, as I have journeyed farther into the DeFi space I have learned more about Layer 2 and how it works and why people love it so much (Low fees anyone?!!?). I’ve gotten a deeper understanding about crypto and the space in general. I’ve been able to learn while making money and being more hands on. I also learned that DeFi isn’t as risky as people make it seem (although there are def some very risky plays to be made).

TL;DR: DeFi can seem pretty scary and inaccessible but it’s worth taking the plunge to learn more. Whether you get a crazy airdrop for participating in a new protocol or you pay off some debt while not selling your crypto there is something for everyone.

As everyone else says…this isn’t financial advice and DYOR.

submitted by /u/lrod45
[link] [comments]