Too much money is being made in Crypto right now. I know you’ve heard it all, 300% gains in one day, 3000% APY in staking pools, and all that. I’m talking about DeFi, the bubble that has taken over the cryptocurrency conversation right now. And oh, it has also made it very expensive to do anything on the Ethereum Blockchain.
But, are you missing out? Let’s first address what’s going on, in case you are confused like many out there. The crypto community is trying to build a decentralized finance ecosystem that is permissionless and censorship-free, much like Bitcoin. The existing products of such initiatives are Decentralized Exchanges (UniSwap, JustSwap) and lending platforms (Compound, Aave, etc.). You can learn more about this in my investing course.
Because of the decentralized model, all those DeFi ecosystems require liquidity to be effective and that’s where the opportunity for making money comes in. If you provide liquidity to the market, you get a share on the transaction fees on exchanges and/or interest which is earned through borrowing on lending platforms. This can be directly or through a “pool” (high returns) which essentially is just a basket of coins from different people around the world.
How is the money being made? The pools can be created and controlled by anyone. Most DeFi platforms have a dynamic interest rate model which is calculated every second based on supply and demand. The pool developers move their coins to different platforms chasing for the most profitable one, this can be automated or done manually. This is called yield farming. Yearn Finance is the platform that has been successful with this and influenced many others to get into the game.
Easy money you think? Hell No!!! You really can make money in DeFi, there are good opportunities with much lower risk of course, and I covered that step by step in my investing course. You could follow the not so high return but low-risk option and be just fine, or you can go crazy like many crypto newbies out there chasing for the highest yield and lose all your money. I can list a few obvious risks that most people are choosing to ignore:
- Exit Scam – since anyone can launch a DeFi platform without even revealing their identity, a DeFi platform can simply scam you and run. We’ve seen this already with Sushi.
- Hacks or Contract vulnerability – Most of these yield farming platforms are trying to get to market ASAP to not miss the bubble and they choose to not audit their own code by third parties. We’ve already seen this happen and it collapsed YAM finance.
- Gas fees – DeFi has attracted too many participants too quickly which has resulted in too much traffic on the Ethereum blockchain. Due to this, gas fees are too high ranging from $9 to $100 per transaction, which makes it impossible to do basics such as swapping tokens or withdrawing. I did an experiment on my YouTube channel and ended up losing my 0.8 ETH to gas fees without even being able to participate in a pool. Yield farming is not a poor man’s game.
- Scam Token risk – For every real DeFi token, there are 20 fake versions of it on Uniswap. You could think that you are swapping token A for B but end up receiving token Z because it has the same name as token B but they’re different.
How to do it right then?
The truth is, you are not missing out. Of course, it helps to play around with some of these things just to learn and be ahead of the curve but as it stands, Yield Farming is dangerous. DeFi itself is great and has potential but it requires careful research, technical know-how, and diversification. In my opinion, Centralized Finance (CeFi) is currently better than Defi because it is safer, transparent, and it guarantees fixed APY. More about safer CeFi platforms in my investing course.
To wrap this off, if you thought you were missing out when your friends were killing it on SushiSwap etc., you were actually wiser because they most likely lost money. This, however, should not discourage you from exploring DeFi and its opportunities, at best it should just alert you to be more careful.
I have a DeFi module in my investing course that shows you step by step how to invest in DeFi. You can find it here: https://cryptouniversity.co.za//crypto-investing-course/
See you on the moon,