Finance 2.0 is here: DeFi — Part 2


Finance 2.0 is here: DeFi — Part 2

Part 2: How to get started earning up to 15% interest

If you missed part 1, click here or read the Part 1 TLDR; Banks suck, DeFi is making a new ecosystem that sucks a lot less by cutting out the middle men and giving the benefits back to you, the user.

In this segment we will understand some of the risks involved in the space, walk through how to get started, and touch on what’s coming next (more on that in part 3).

So you’ve heard that you can make up to 15% interest (compounding continually) with DeFi and you want to jump in and get started. For many people DeFi represents a more perfect system built on a more perfect form of money. It is to finance what democracy was to governance; a more open, fair, inclusive system. Welcome to the financial revolution, my friend.

On Dharma, you can watch global interest grow in real time, along with the current variable interest rate.

Before we get started it’s important to understand the risks, because there are always risks. Firstly we are talking about a brand new technology in cryptocurrency, which has only existed for 10 years but really only about 4 years in the case of Ethereum. So there’s inherent risks there: it’s new, and new flaws can be discovered at any time just like with any technology. In fact there are still critical 0-day exploits being discovered in Windows and iOS operating systems. There is also protocol risk-the risk in the underlying protocol. Because all of this infrastructure is built on top of Ethereum it is possible that there is some flaw in the Ethereum blockchain that will cause the system to malfunction. Not only that but the systems are all inter-operable, meaning they can be plugged into each other to make something new, kind of like Legos. This is a flaw inherent to all systems. It’s why banks and Military vehicles like the F-22 Raptor use systems coded in extinct languages: they’re time-tested and difficult to hack because few are well versed in their languages. So while it’s unlikely a system-breaking bug will be found, it’s still possible.

The most secure forms of money ever created, Bitcoin and Ethereum, have never had their protocols hacked despite billions of dollars in potential rewards for hackers. In fact in late 2012 Argentine entrepreneur Wences Casares paid professional hackers some $250,000 to hack the Bitcoin protocol. They failed, admitting, “it can’t be done”
…in late 2012 Argentine entrepreneur Wences Casares paid professional hackers some $250,000 to hack the Bitcoin protocol. They failed…

It’s important to realize that there is huge incentive for hackers to find these bugs: if they can break the system, they can loot it and walk away with potentially billions of dollars. Neither Bitcoin nor Ethereum protocols have ever been hacked. It’s a sliding scale of complexity; the more complex, the more it can do…but the more risk we open ourselves to. Understand the risks? Good, now we can move on to the juicy bits!

If you don’t know the basics of owning crypto yet, it’s good to start with some intro videos on YouTube or articles on Medium to get a handle on the basics. We’ll need two things before we start: a wallet and some Ether. Choose a wallet that’s web-enabled like MetaMask (the industry standard browser wallet) or Coinbase Wallet, but hardware and phone/app wallets will work too. If you don’t have any Ether yet, this is the base currency for getting around the DeFi highway. You’ll need it to at least pay for transactions. You can get your hands on some at government regulated exchanges like Coinbase, Gemini, or Liquid. Or try your hand at a P2P exchange like LocalEthereum.

Chasing those sweet returns

So you want to start getting up to 15% interest? Lets do it. Start by exchanging your Ether for Dai, a stable coin that is tied to $1USD. You can check the list here to see where you can get it, but since we’re getting into DeFi, let’s start with a Dex. A Dex, or Decentralized Exchange, is an exchange that doesn’t have control over your money when trading. It’s non-custodial, which means we don’t have to trust it. So lets head to which is a Dex aggregator. It will help us to check ALL the Dexes and get the best price so we don’t get ripped off. Cool! Imagine exchanging money at the airport and they showed you their competitors rates…not likely.

This Dex aggregator shows us how much Dai(1 Dai == $1 USD) we can get for 1 Ether, and the various rates at competing Dexes. It shows us slippage (price increase per unit sold) and allows us to split our order among different Dexes to avoid slippage.

The aggregator will automatically choose the best rate and spread the order across various sites to avoid slippage if necessary.

Now we’ve got Dai and we’re ready to invest it and start earning interest. To find the best lending rates across the industry we’ll visit to see the various rates for Dai (and other coins).

The interest rates for lending Dai, courtesy of Rates can fluctuate wildly, but the average rate for 2019 is 13.8%.

Note that LoanScan also includes other centralized solutions, and doesn’t include every decentralized solution (it’s missing Nuo Network and Fulcrum).

Each platform is slightly different and their complexity varies. If you’re after the easiest user experience, pick Compound. If you’re after the best rate bar none, pick Dydx or Dharma.

Compound — for beginners:

Compound currently support 3 wallets, seen above.

Connect your wallet, and sign the message if requested to enable Dai.

The Compound overview for Dai shows the current borrow and lend rates along with other stats

Click the “supply” button and wait for the popup:

Compound knows how much Dai is in your wallet, and shows you how much you can lend out.

Choose how much Dai you want to lend out. Important: Never invest more than you can afford to lose, there is no FDIC backing these loans

MetaMask wallet confirmation for despositing Dai

Here’s the final step: confirm the transaction to deposit Dai into Compound and wait for the transaction to go through, about 30 seconds.

That’s it! You’re earning better interest than you ever could with a savings account. That wasn’t hard, was it? You can see your total interest earned and how much you have invested. If you want to cash out go back to compound and click withdraw, following the prompts.

Note that unlike a CD (Certificate of Deposit) at a bank, you can pull your money out at any time and you pay no penalty.

dydx- for medium-advanced users:

dydx has their wallet connect in the upper corner, and lists their interest rates clearly visible.

Visit dydx and connect your wallet and sign the popup message, if requested. Click the deposit button, select Dai, enter the amount, and click deposit. Confirm the transaction and wait 30 seconds. That’s it! Any funds deposited in dydx automatically earn interest at the stated rates on their deposit page.

Can you imagine if investing in stocks or mutual funds was this quick and easy? Wouldn’t it be nice if banks automatically gave you interest on the money you let them hold? It’s easy to see why DeFi is not only the future of investing, but of finance overall.

How is this possible??

My bank only pays me 2% interest, maybe 2.5% if I lock the money in a CD for 6 years. Why is the interest so high? is something shady going on?


Traders take out loans in Dai to fund their strategies, which usually pay greater than the interest rate that they pay on the loan.

The rates are high because you’re trading Ether, a highly volatile asset, for Dai, a stable asset. In doing so you’re missing out on the gains if Ether goes up 20%. But you’re also protected if Ether falls. The people taking out loans are usually trading these assets to leverage a position and make more than the interest rate they are paying. But what if these traders fail and lose the money that took out?

Not to worry. These loans are collateralized (something pledged as security for repayment of a loan, to be forfeited in the event of default) at 150% minimum, so even if they lose the entire loan AND and price of Ether falls by 50%, two unlikely scenarios, your loan is still 100% backed. In fact we see most loan takers being overly cautious and putting up an average of 350% collateral.

The collateral ratios of various lending platforms. Notice the average is a whopping 358%, meaning for every $1 that is lent out, there is $3.58 in reserves. Compare this with modern banks that have a reserve ratio of between 3–10%; for every $1 you have in your account the bank only actually has $0.10

So there you have it, you’re now making possibly the best returns on your money.

What’s next for DeFi?

Loans are a pretty basic and standard tool, but it was difficult to make them work securely and reliably without someone in the middle protecting against attacks. Now that the hard work is done we can start building on top to create even more exciting opportunities.

What’s coming, in part 3 we will explore:

  • Atomic Swaps- A trade between 2 people with no intermediary whatsoever.
  • Synthetic assets- A token that represents an asset such as a stock, eg AAPL, that an be traded by anyone anywhere to get exposure to new markets.
  • Mutual funds- Choosing advisers to invest your money based on their transparent track record.

Finance 2.0 is here: DeFi — Part 2 was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.