As mentioned above, DeFi refers to decentralized finance. Decentralized finance applies blockchain technology to existing traditional and centralized financial concepts such as lending or lending. In traditional finance (TradFi), power and control are concentrated within archaic institutions and societies. DeFi, by contrast, distributes financial power and control among participants.
Explaining the details behind how DeFi works is beyond the scope of this article, but, in general, the terms you’ll hear about are lending, lending, staking, providing liquidity/mining, and yield farming.
These are most likely the tools you’ll use while experimenting with DeFi, and the returns you can generate are likely much higher and more accessible than other passive income strategies you’ve come across.
Table of Contents:
What is a DeFi platform?
A DeFi
platform is an application that has made DeFi tools available in user-friendly ways. These instruments are the above-mentioned lending, lending, staking, liquidity provision and yield farming.
Not all blockchain protocols have the same DeFi opportunities. For example, it will be difficult to find the same DeFi functionality on the Bitcoin blockchain as you would on the Ethereum blockchain. Ethereum has opened the doors to DeFi and still offers the most opportunities. Ethereum has its drawbacks, however, and DeFi platforms on other blockchains, such as Binance, have done well to improve the experience for newcomers.
There are two main types of DeFi platforms. The first is known as DEX, a decentralized exchange, and it’s easier to get started. DEXs facilitate the exchange or “exchange” of one cryptocurrency for another. To offer this they also have liquidity pools to facilitate swaps and often have yield farming along with staking. As you explore DEXs, you’ll see that some are more suited to particular groups of tokens depending on the blockchain they’re built on.
The second type has different functions than a DEX and is more suitable for borrowing and lending. They are often called lending platforms. Sometimes stakeout, liquidity provision and yield farming are also available, depending only on the platform. Lending platforms are used to deposit assets in order to use them as collateral for loans rather than exchange.
There are centralized exchanges, CEX, even in DeFi. Some, like Binance and Crypto.com, also offer DeFi tools. Without further ado, we enter our list of DeFi platforms for crypto beginners.
Four DeFi platforms for beginners
Below are four relatively simple platforms to get your feet wet in DeFi.
It should be noted that even the simplest DeFi platforms require a basic understanding of cryptography, and there are inherent risks with using DeFi (in fact many of the biggest hacks of recent years have in DeFi). That said, if you’re still interested in DeFi, these four products represent solid entry points:
PancakeSwap
PancakeSwap is a DEX built on the Binance blockchain. You won’t find loans and loans on PancakeSwap, but there are plenty of staking and liquidity (LP) opportunities to keep an eye on. Binance has historically had very low transaction costs, making this DeFi platform indulgent and fertile.
SushiSwap
SushiSwap is a unique DEX in that it is well integrated between blockchains, which makes it quite versatile. They have their own suite of offerings that include loans and loans along with staking and LPs. The user experience on SushiSwap is similar to PancakeSwap, but with an expanded suite of offerings to explore.
Anchor Protocol
Anchor Protocol is the first and most user-friendly of our non-recommended DeFi DEX platforms. Anchor prides itself on having the highest and most stable APY, annual percentage return, of any protocol. You’ll see some sky-high APYs out there, but they float a lot. Anchor’s APY consistently hovers around 20%, which is very high by TradFi’s standards. Anchor is built on Earth’s blockchain.
Yearn Finance
Yearn Finance was started by DeFi’s “godfather”, Andre Cronje. It is referred to as such, because it was essentially the first person to start offering DeFi as a service. You’ll notice some high APYs on Yearn’s platform, but the process is less user-friendly. Ethereum started as the main blockchain protocol for Yearn, resulting in high gas (transaction) fees. Yearn has expanded to many other blockchains including Binance and Avalanche which both offer much cheaper transaction fees. Be diligent with your research before diving into this.
A recommendation on the DeFi strategy
While there are plenty of money-making opportunities out there, you don’t need to rely on platforms like the ones mentioned above for your passive income interests. Many projects offer DeFi capabilities within them. Check the tokens you are interested in or already own. If they offer staking, liquidity provision or other, then you have the opportunity to get interest on tokens you already believe in, and often with less risk than external platforms.
You can keep them long-term and also profit from your interest along the way.
Regardless, you should always start small and never risk money you can’t afford to lose.
DeFi opens up a world of possibilities
We looked at the fundamental idea of DeFi and DeFi platforms,
the most user-friendly DeFi platforms out there, and some extra ideas to keep in mind.
Now you also get an idea of the terms you’re likely to encounter while diving into DeFi. Good luck with your yield generation efforts.
