What is DEFI?

Defi (or”decentralized finance”) is an umbrella term for financial services on public blockchains, primarily Ethereum. With Defi, you can do most of the things that banks support - earn interest. Borrow, lend, buy insurance, trade derivatives. Trade assets, and more - but it’s faster and doesn’t require paperwork or a third party. As with crypto fgenerally, DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and open to all.

Why is DeFi important?

Defi takes the basic premise of Bitcoin - digital money - and expands on it, creating an entire digital alternative to Wall Street, but without all the associated costs (think office towers, trading floors, banker salaries). This has the potential to create more open, free and fair financial markets that are accessible to anyone with an internet connection.

How does it work?

Users typically engage with DeFi via software called dapps (“decentralized apps”) most of which currently run on the Ethereum blockchain. Unlike a conventional bank, there is no application to fill out or account to open.

Here are some of the ways people are engaging with DeFi today:

• Leding: lend out your crypto and earn interest and rewards every minute - not once per month.

• Getting a loan: obtain a loan instantly without filling in paperwork, including extremely short-ter, “flash loans” that traditional financial institutions don’t offer.

• Trading: make peer-to-peer trades of certain crypto assets - as if you could buy and sell stocks without any kind of brokerage.

• Saving for the future: put some of your crypto into savings account alternatives and earn better interest rates than you’d typically get from a bank.

What are the advantages of staking?

Many long-term crypto holders look at staking as a way making their assets work for them by generating rewards, rather than collecting dust in their crypto wallets.

Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions. (some projects also award “governance tokens” to staking participantsm which give holders a say in the future changes and upgrades to that protocol.)

What are some staking risks?

Staking often requires a lockup or “vesting” period, where your crypto can’t be transferred for a certain period of time. This can be a drawback, as you won’t be able to trade staked tokens during this period even if prices shift. Before staking, it is important to research the specific staking requirements and rules for each project you are looking to get involved with. 

What is yield farming?

Yield farming, also referred to as liquidity, mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it mean locking up cryptocurrencies and getting rewards.

In some sense, yield farming can ve paralleled with staking. However, there’s a lot of complexity going on in the background. In many cases, it works with users called liquidity providers (LP) that add funds to liquidity pools.

What is a liquidity pool? It’s basically a smart contract that contains funds. In return for providing liquidity to the pool. LPs get a reward. That reward may come from fees generated by the underlying Defi platform, or some other source.

*DAO - decentralized autonomous organizations - it is an internet-native organization collectively owned and managed by its members.