DeFi: the trustless solution
Banks take in cash deposits, make interest-bearing loans, and pay out some of what they receive as interest to depositors. That’s a prime example of banks making their (and your) money work for them.
Usually, they’ll rinse and repeat this profit-generating process time and time again, with you getting a slice of the action through interest paid on your savings accounts. For the last 10 years though, that’s been pretty much close to nothing: right now, the average interest rate in the US is just 0.09%.
Throw in the occasional financial crisis and subsequent bailout and you’ve got a tale as old as time.
But for lots of people, that doesn’t matter: they’re blocked from fully participating in the financial system in the first place. 1.7 billion adults worldwide are unbanked – and even those who are banked don’t get much say in how the banking around them works. In a way, then, access is still the problem child of modern finance.
Until now. Enter DeFi.
Decentralized Finance – a.k.a. “DeFi” – is an emerging open and global alternative to the restrictive, centralized and centuries-old traditional financial system much of the world knows today. DeFi offers anyone with a smartphone and an internet connection the opportunity to put their money to work on their terms across services like investing, borrowing, lending, and trading.
Rather than have banks act as intermediaries, DeFi puts individuals at the center of a peer-to-peer financial system run on open-source blockchains like Ethereum.
How to invest in DeFi: a step-by-step guide
Once you decided to invest in DeFi you need to follow the steps in the list below:
Step 1. Create a wallet.
To make the most of DeFi — including staking and lending — you will need a non-custodial wallet like NEB Wallet.
Neb Wallet is perfect for DeFi:
- Track any DeFi assets, including staked tokens, liquidity pools, farms, and debts
- Find the best swaps on DEXes
- Easily switch between 10+ Layer-1 and Layer-2 networks.
Step 2. Choose your blockchain network.
After your crypto wallet is ready, you should pick the primary network for your DeFi investing.
Ethereum is still the leading blockchain for DeFi. However, its high gas fees might make it prohibitively expensive if you’re just starting out. On some days, a simple transaction might cost over $10 and a more complex action like lending tokens can set up back by up to $100.
Alternative Layer-1 networks or Layer-2 scaling solutions for Ethereum have transaction fees under $1.
Here is a list of some well-known networks that are supported by Neb Wallet:
Step 3. Fund your wallet.
Buy the native tokens for the blockchain of your choice: ETH for Ethereum, FTM for Fantom, and so on. You can either buy these cryptocurrencies on one of the centralized exchanges or use an on-ramp, which is built into NEB Wallet.
Step 4. Acquire your DeFi coins.
Once having chosen the DeFi protocol you are interested to invest in, you need to purchase the corresponding DeFi coins or tokens.
You can buy tokens on any of the decentralized exchanges or right in NEB Wallet, which can automatically find the best price for you.
Step 5. Stake, lend, use DeFi protocols.
DeFi lets you maintain ownership over your assets.
As we’ve discussed, you can stake your tokens, lend them, or provide liquidity to earn rewards. The easiest way to try this out is with NEB’s ‘Explore’ feature that shows some of the options you have in DeFi.
Step 6. Choose a Liquidity Pool.
Investing in liquidity pools could be another way to diversify your DeFi holdings.
NEB’s Pools tab shows you some of the most popular liquidity pools and makes it very easy to join them in a few taps.
The bottom line
DeFi became one of the fast-growing investment trends in crypto.
However, as with any other investment, there are some risks. Before putting significant money into DeFi investing, it’s important to start small, see how it works, and do your own research.
DeFi transforming the financial industry
In much the same way as artificial intelligence and machine learning in FinTech are disrupting the wealth management space, DeFi will transform banking and financial services. For instance, the “robo-advisor” in wealth management commoditized several core financial advisor services, like reviewing and constructing portfolios. Once adopted, the same “robo-advisors” that had disrupted them were then allowing these companies to operate more efficiently and work with clients that they would not have served previously, such as those with lower income. Advisors, meanwhile, began to focus on more valuable services, such as holistic financial planning. This is a common theme seen in disruptive technologies.
Along the same lines, DeFi will commoditize some of the core services that banks, financial services companies, and even FinTechs offer today, such as lending, and it will enable them to provide services more efficiently, benefitting the end-consumer. Forward-thinking businesses will need to understand where the risks for disruption are. For example, financial institutions may take a more significant focus on the customer/investor experience as they see DeFi’s potential to compete much more cost-effectively with some of their core products and services. (See Beyond the Bot, where Gartner predicts that soon “89 percent of businesses will compete mostly on customer experience.”)
“Many enterprises still haven’t really grasped the implications of DeFi yet,” notes Gabe Higgins, Blockspaces co-founder, “but several pioneers are paving the way. Traditional companies like Shapeshift and Binance, which are both digital asset exchanges, have taken strides in embracing DeFi instead of waiting to be disintermediated. It won’t be too long before financial services will need to confront the fact that their long-standing, entrenched services are being replaced by decentralized protocols that give users more transparency and control over their assets.”
There is hope for banks, FinTechs, and anyone else wanting to get ahead of the curve and build financial technology leveraging these emerging trends. As much of what is happening in this space is made using open-source technology, DeFi protocols can be used to deploy innovative, differentiated products and services rapidly. The great thing about this space is that much of the tech being created is at the infrastructure and middleware level, allowing people or organizations to build valuable applications that serve specific use-cases quickly. This is why the DeFi space was able to gain so much traction and innovate as fast as it did. Developers can sometimes spin up a new product in literally just a few days. However, we aren’t really seeing enterprises engaging at this level yet, a potential opportunity in the near future.
As previously stated, DeFi is built on a distributed ledger infrastructure. The advantage of building applications on top of distributed systems is that it allows open access and can disintermediate certain actors, making many financial use-cases more efficient and less costly. DeFi applications can run autonomously without the influence of a central operator; they are often governed in a democratic fashion whereby the users have control over the future of the application or protocol.
Almost any centralized financial service or product could be replaced by decentralized protocols and/or blockchain-based tokens. We’re currently seeing this in lending and trading. For example, in the DeFi lending space, the protocol disintermediates the lender matching process, the risk management process, loan provisioning, and the ultimate transfer of value between parties.
In the investment management space, crypto tokens and blockchain-based algorithms are starting to replace the need for ETFs (Exchange Traded Funds), mutual funds—baskets of assets and equities—and even hedge funds, enabling lower fees and virtually no limitations in terms of access.
For example, suppose decentralized protocols/algorithms are applied. In that case, there doesn’t even need to be an intermediary manager, perhaps just a token derivative representing the individual stocks or assets, and a computer algorithm that rebalances and/or trades based on a set of rules or criteria. All of this happens automatically due to smart contracts (essentially self-executing programs that run on a blockchain).
Finally, DeFi protocols democratize access since anyone can use them. Banks only provide services to individuals who meet specific requirements around credit, account balances, etc. DeFi protocols’ open-source nature makes them, by default, open for use by anyone with the right means to access them (a device, internet, and a crypto wallet).
“We’ve seen the first iteration of this with the internet,” says Tyler Tarsi, CTO Recursive Research. “Instead of being located in a major city, people can contribute value from anywhere in the world with just a connection. But what we’ve lacked so far is an effective way to transfer value in an internet-native way, and that’s where DeFi infrastructure comes in. I’m excited for that because it’s much more equitable and transparent than the gated world we live in today. It’s going to take a while to get there, building new financial infrastructure from scratch is no small feat. But it is inevitable.”