Why DeFi should be your next investment
So you’ve got some spare cash and you’re looking for online investment. You’ve done your research and heard the same options repeated over and over again: stocks, bonds, mutual funds, property, and so on.
Maybe none of these have caught your interest. The minimum investment is too high, the returns are too low, or they’re frustratingly time-consuming.
You’re not alone, that’s why many savvy investors are turning their attention towards a new financial sector called DeFi.
DeFi boasts returns of 5-15% APR/APY along with a host of other benefits including:
- Low fees
- Low risk
- High liquidity
- An expanding market
But what is DeFi?
DeFi or Decentralized Finance is not so much a definition as a movement spearheaded by the crypto community. Its goal is to create completely automated financial tools allowing everyone to earn, lend, and invest on their own terms.
DeFi tools can often sound a bit like Fintech (Financial Technology) platforms like Robinhood or Cashapp. However, fintech builds on pre-existing models and technologies to provide their services. DeFi tools are powered by new blockchain tech and run autonomously on smart contracts.
In this article we are going to briefly explain just how DeFi is transforming the face of modern finance and how you can get the best online investment today.
Why are DeFi fees low?
In traditional financial institutions (banks, stock brokers, etc), large profits are made off transaction fees placed on the customer when money is moved.
A typical international bank wire can often require you to pay:
Transfer fee + Additional percentage of transferred amount + Currency conversion fee
Many modern fintech platforms have grown quickly by eliminating many of these annoying fees. But what’s stopping them from slowly raising prices once their user base gets large enough?
DeFi enthusiasts believe that only a decentralized platform can guarantee low fees forever. That’s because decentralized platforms are by nature completely autonomous and aren’t driven by profit. They don’t have to answer to shareholders looking for growth every quarter.
Invest in DeFi, you only pay the fees that are absolutely necessary. Generally these are gas fees (very very low percentages of the transaction to cover electricity/processing costs) or interest needed to keep investors on board. No outside party is looking to skim off a little extra to line their pockets.
For some perspective, a crypto user transferred $450 million in Bitcoin for about $0.25 the other day. Just imagine if that had been done between banks in USD.
Low risk in DeFi
When you invest your money you are essentially giving it to other people and saying, “make me more of it!” This always comes with a certain amount of risk.
While returns on the stock market can be astronomically good, they usually only appear when investors put painstaking time and effort into researching their investments. A poorly-vetted stock portfolio can leave you poorer than you started. That’s why many investors pay for experts to do it for them.
For other sources of fast gain you could look into some newer fintech options like peer-to-peer (P2P) lending. But even here you’re often out of luck. Sure, potential gains and investment minimums aren’t bad, but usually there are few ways to assure that a borrower won’t default on their loan .
If you want low risk you can always invest in bonds or mutual funds but often at the cost of gain. As of December 2019 US government bonds yielded a paltry 2.36 percent.
Even money placed in a savings account is usually loaned out by banks for massive profits. While this money is insured and can be withdrawn freely, imagine what would happen if everyone tried to withdraw their money from their bank at once?
DeFi takes risk out of the equation by letting autonomous and transparent protocols like smart contracts run transactions for you. That way, you always know what you’re buying into and you don’t lose your principal.
In Compound, users can lock compatible digital currencies into a smart contract that doubles as an asset pool. They then receive returns of up to 6% on secured loans borrowed from the pool by other crypto users who pay back interest.
Borrowers have a high incentive to pay back their loans because they must “overcollateralize” or put down a higher amount of crypto than they plan to transact into the system. These collateral funds are automatically liquidated to cover principle in the case of default.
Compound creates a system where trust is shifted to machines and rates are decided by the market, not a third-party looking for a cut. Because Compound is a lending pool, an occasional default only offsets the amount of interest gained and not the principle. Funds can be added and withdrawn from an account anytime with no fees.
But DeFi doesn’t just provide a risk fix for P2P lending.
High liquidity in DeFi
Besides evading the high fees and risk of traditional platforms, DeFi users enjoy much higher liquidity than platforms bound by fiat currency.
When you initiate an international bank transfer with fiat currency (USD, RMB, EUR, etc), you likely won’t see your funds until the end of a week or longer. Not to mention the additional fees, exchange rates, transfer limits, and paperwork that you may see tacked on.
Issues like these make moving fiat a hassle, and it’s one of the primary issues DeFi and blockchains fix.
As mentioned earlier, cryptocurrencies like Bitcoin are a great way to transfer funds quickly and cheaply. However, many cryptocurrencies can be volatile. No one wants to lose 10% of their funds in a matter of seconds due to a sudden bear market.
Fortunately you have other options.
MakerDAO is an organization that has created a DeFi solution for easily transferable digital currency that doesn’t lose its value. It’s called DAI.
DAI is a type of cryptocurrency called a stablecoin. It holds value 1:1 with the USD and can be transacted in a matter of seconds as a USD equivalent anywhere in the world that accepts it. The DAI protocol ensures the market price of DAI is always tied about 1:1 with the US dollar so you don’t have to worry about losing your money when transferring.
In the Maker system, users create DAI by locking their digital assets into a smart contract and an equivalent USD value of DAI is then released to their wallet. DAI is essentially a loan that pays its interest back to you. When you want your digital currency back, you simply pay back the amount of DAI you originally put in the contract plus a slight interest fee to help stabilize the price. You then receive your original coins plus a percentage of any extra interest earned from the sum of assets stored in smart contracts on the platform.
Now you may be thinking:
I don’t have any cryptocurrency and these platforms sound complicated. Is there an easier way to invest with DeFi?
While DeFi has grown by leaps and bounds in the past two years, it is unfortunately still largely inaccessible to those outside of crypto.
However, a number of fintech platforms have sprung up to fill in the cracks. These platforms allow fiat users to easily use DeFi without first needing to buy into crypto.
One such platform is called MyConstant.
MyConstant is a lending platform that has adapted DeFi tech to be more accessible – and profitable – to the “average Joe” investor and boasts returns of up to 7% APR.
In a system inspired by smart contracts, borrowers on MyConstant put up cryptocurrencies like Bitcoin as collateral to a third party before they are matched with a lender/investor for a USD loan.
With MyConstant, you can directly deposit your USD into collateralized lending pools. When doing so, you earn an automatic 4% APY, simply by allowing us to lend the money on your behalf. Borrowers must overcollateralize their loan and in the case of default, their funds will automatically be sold off to cover investor principle.
MyConstant gives you a unique tool for accessing the secured, low-risk/high-return loans of DeFi regardless of if you own cryptocurrency. We also provide a great starting point for anyone wanting to enter the exciting world of crypto. Investors are able to deposit USD and withdraw any amount of their deposit in stablecoins like DAI or USDT that can be used to purchase crypto on exchanges.
DeFi is an exciting and ever-evolving industry working to unlock financial freedom and flexible rates for individuals all over the globe. Though it is still in its infancy, DeFi’s platforms and user rates have been expanding quickly with USD investment rates growing over 130% in 2019.
There has never been a better time to start investing in DeFi and there are more and more platforms appearing every day to help you do it. Why not join a movement working to make finance more fair and transparent for all and grow your money at the same time?
Sign up for a free account on MyConstant today and start dipping your toes in the future of finance
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