What is DeFi?
I love the word DeFI! It stands for Decentralized Finance and on the other hand it is DeFIance of the current financial system that makes it such a wonderful pun.
DeFI is the use of cryto-currency to create an alternative decentralized financial system that is independent of central bankers, politicians and high finance. It aspires to be able to perform all banking activities such as generating interest on deposits, bank transfers, loans, capital raising and more.
In this pot, we discuss how we can generate interest from cryptocurrency deposits.
Loan List is a comparison tool that allows us to see which cryptocurrencies are generating the highest interest for depositors. It also provides information on which dApps (decentralized applications) are giving the best interest rates, and all historical data on deposit and loan interest.
Above, we see a short summary of the most popular cryptocurrencies and what the existing deposit rates and loan rates are.
We can see that DAI provides the highest interest rate deposits at 2.20% and the lending rate is 5%. As the interest rate of DAI fluctuates to maintain its peg to the US dollar, we can see that the monthly (annual) average deposit interest rate is 6.59% (5.87%). USD interest rates on deposits can range from 0.25%-1%, anything above this amount is very attractive. Furthermore, with cryptocurrency like DAI, there are no fixed maturity dates or minimum amounts. Whatever you deposit in one of the exchanges will automatically generate the promised interest rate.
Once we click on DAI, we see a list of dApps like Aave, Compound, dYdX, etc. These are different deposit taking platforms or exchanges that you can deposit your cryptocurrency in to generate interest. This is similar to seeing a list of banks that show you how much interest you will get for your term deposits.
We see that DDEX generates the highest interest at 3.89%. However, there are other platforms such as dYdX that offer pretty good rates at 2.82%. Remember that
Just as an example, let’s try depositing DAI in the dYdX dApp platform!
dYdX is an open trading platform for cryptocurrencies. You can deposit your cryptocurrency in dYdX and other traders on the platform will loan your cryptocurrency and pay you interest as they will be using the loan to leverage their cryptocurrency trades. Click on “Start Lending”.
Once we have clicked on “Start Lending” the new page below requests that we connect our Ethereum wallet.
Select the wallet that you are currently using. I am using a Coinbase Wallet
You can see below that my dYdX account currently has a current account value of USD$503 that is earning +2.92% per annum. Click on “Deposit”
Once you’ve clicked “Deposit”, a new window will pop-up where you need to select what currency you’d like to deposit. From the earlier sections, we saw that DAI had the highest interest for depositors. Thus, we can key in the amount of DAI we would like to deposit from our wallets.
Below, you can see my CoinBase wallet has 0.00 DAI as I’ve already deposited all my DAI previously. I currently have 491.0702 DAI generating 2.82% of interest per annum
If you wait for a few minutes, you will see your DAI balance start to grow. In the previous image there was 491.0702. After 5 minutes you can see my DAI balance is 491.0703. It’s nice to see your cryptocurrency grow!
And that summarizes how you can participate in the DeFI platform and generate interest from your cryptocurrency!
We have gone through how you can use Loan Scan to see which cryptocurrency generates the highest interest and which platform will give you the best return for your money. We walked through an example that deposits DAI into the dYdX platform and transferring funds from a CoinBase wallet.
Summary of Cryptocurrencies
DAI. Dai is a decentralized stablecoin created by MakerDAO. Price volatility is often a characteristic of cryptocurrencies such as Bitcoin and Ether, thus DAI is designed to be a more reliable, stable cryptocurrency that is pegged to USD$1. DAI is built on the Ethereum network and its price stability is based on the instructions in the smart contract. These instructions are such that if the value of DAI is less (greater) than $1, the interest rate being generated by DAI will increase (decrease) to incentivize more people to purchase (sell) DAI. This interest rate is also known as the stability fee. Raising or decreasing the stability fee is voted by a community of people who hold MKR tokens, that is the governance token for the MakerDAO system. In this sense the community of MKR token holders are analogous to a decentralized group of people acting as a central bank for DAI.
USDC. USDCoin is a centralized stablecoin. They are ERC-20 tokens that are built on the Ethereum network. USDC maintains its price stability as it is backed by fiat US dollars that is held in reserve by regulated financial institutions. It is also built on the Ethereum network. As each USDC is backed by USD, each token itself can be redeemed for USD$1.
ETH. Ether is the native token of the Ethereum blockchain network. It is the second most popular cryptocurrency after Bitcoin. Ethereum is an open-source platform that runs smart contracts, and as the execution of these smart contracts requires computing resources, Ether is used to pay for these computing resources. Ether is not a stablecoin and is subject to volatile price fluctuations.
WBTC. Wrapped Bitcoin brings the functionalities of the Ethereum network to Bitcoin. Each WBTC is an ERC-20 token that is backed by 1 Bitcoin. WBTC is not stablecoin and is subject to volatile price fluctuations of Bitcoin itself.
ZRX. 0x (or ZRX) is an ERC-20 token that is used as a building block for decentralized exchanges (DEX). DEX’s are gaining in popularity as at least USD1 billion has been lost by centralized exchanges due to hacks, malfeasance or incompetence (e.g., Mt Gox). ZRX is not a stable coin and is subject to volatile price fluctuations.
REP. REPutation is the native token for Augur. Augur is an Ethereum based decentralized prediction market. Augur allows users to create markets for specific questions (e.g., will Trump win the re-election?) and allowing users to buy positive or negative shares depending on their beliefs of the outcome for the future event. There is an equal probability to a question that requires a Yes or No response, thus initially each positive or negative share costs $0.50. If the event turns out to be a “Yes”, all the negative shareholders will give up their $0.50 to the positive shareholders. However, it is possible to sell these shares prior to the event taking place.
An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading