Everything You Need to Know About Decentralized Finance (DeFi)

With DeFi, you may also opt to lend your crypto and earn interest on it. Most DeFi platforms and decentralized exchanges (DEXs) have a staking mechanism or liquidity pool where you can lock your crypto into the platform and earn interest. Lending helps DeFi platforms to continue facilitating transactions through increased liquidity.

Interest earnings within DeFi are surprisingly high, ranging anywhere from 5%-400%+ in yearly earnings. Comparatively, centralized banks usually offer interest rates as high as .07% yearly on savings accounts. It’s clear why DeFi is becoming so popular.

Lending mechanisms on DeFi platforms have opened up the practice of yield farming, which is where crypto holders routinely seek the highest interest rates on the market to earn passive income.

So how is all of this facilitated on decentralized platforms? Through the use of smart contracts, DeFi platforms are able to process transactions without the need of a middleman or centralized entity holding funds in custody and keeping track of ledgers. Instead, crypto traders lock tokens into liquidity pools and smart contracts use this liquidity to mint new tokens and facilitate transactions.

From smart contracts, a blockchain project called Maker was able to create a stablecoin known as DAI. And with DAI, holders of ethereum were able to collateralize their tokens in exchange for the stablecoin.

Another big innovation that Ethereum enabled were ICOs.

While the ICO craze led to many scams, there were a handful of great projects that survived the 2017 bubble. Most notably, in terms of DeFi, was AAVE, which is now one of the most popular DeFi platforms to-date. AAVE is an open-source DeFi protocol that allows borrowing and earning interest on collateralized tokens.

DeFi saw huge growth in the middle of 2020 but declined a bit later in the year. Despite drops in the token value of popular DeFi projects, their usage and development continued well into 2021. Now, many are speculating a “DeFi Summer 2.0” as the Ethereum blockchain is slated to release an important upgrade in July 2021.

The new upgrade, EIP-1559, is expected to help lower gas fees substantially. What’s more, mainstream adoption is steadily on the rise with the popularity of NFTs , the recent Coinbase listing, and the surge in the price of Dogecoin.