Ask yourself what your bank has done for you lately.
I didn’t get the loan for my house from Bank of America. I used a broker and found the best one available. The cash that sits in my bank account doesn’t make me any money. Still, the bank uses my money and makes millions. My traditional savings and investments like a 401(k) or College Savings Plan don’t go through my bank. I’ve talked to a financial advisor at Bank of America, and I left unimpressed.
I’m not saying quit your bank. From my company to personal accounts, my banks all have a purpose — like ATMs, paycheck deposits, etc. But, there’s a better way to save your money and earn interest on it: decentralized finance (DeFi).
It’s OK to be skeptical. I get it! Most of us are comfortable with the traditional banking system. It has buildings and people who wear nice suits. But — although this should be obvious, it’s worth repeating — they don’t give a fuck about you. Not only do banks charge fees and fines whenever possible, many banks, including the largest ones, lack ethics. Considering banking scandals such as Wells Fargo’s predatory and illegal selling of financial products to people of color to the entire 2008 financial crisis, caused by banks giving home loans out to anyone and packaging toxic assets based on them, it’s time to at least open up to the idea that there are better ways to manage your money.
Welcome to the second part of Crypto Dad, a series explaining the ins and outs of crypto investing. In Part One, I crowned myself the Crypto Commissioner of Venice Beach and talked through some basic crypto investing: “HODLing” Bitcoin, Ethereum, and USDC, and depositing them with platforms including Crypto.com, Blockchain.com, and FTX. Following this advice can earn you anywhere between 4% and 13% interest.
Below is what you need to know to utilize DeFi to earn a higher yield. But first, what the fuck is DeFi? Following that, I’ll provide four steps you need to take to prepare to invest in DeFi.
Decentralized finance (DeFi)
Think of DeFi as organizations that offer similar functions as banks, but without a rich Wall Street CEO in control. Rather, DeFi works from the bottom up. Apps in the space operate mostly on public blockchains to serve their customers a variety of financial tools, including payments, loans, insurance, and derivatives. Typically, DeFi doesn’t require a customer to provide any personal information, instead relying on smart contracts, although this aspect does leave the door open for hackers and other bad actors.
Here’s an excellent explanation from Paul Veradittakit, investor at Pantera Capital, of how DeFI lending platforms work:
“Decentralized lending platforms work by matching depositors, who seek low-risk interest rates in exchange for lending their funds, with borrowers. While the traditional banking system uses ‘creditworthiness’ — through credit scores and other KYC practices — to extend a loan, most DeFi lending platforms require that loans are over-collateralized. In other words, a borrower must deposit more currency in collateral than the total value of the loan, typically 2–3x. This guarantees that loans are repaid without trusting, or even knowing, the other party.”
How to prepare to utilize DeFi
DeFi is still in its early stages, and as such, has a long way to go on customer experience. Compared to traditional retail financial products, DeFi applications are not easy to use. I tell myself, “We are still so early to DeFi becoming mainstream, so of course it’s clunky. But being early means making money.”
First, it’s important to note that DeFi products are available on different blockchains. DeFi applications first appeared on the Ethereum blockchain. But the gas fees — the money charged to conduct transactions — on Ethereum are awful, and if you aren’t careful, you could pay hundreds, if not thousands, of dollars in fees that would basically erase your gains.
This created an opportunity for other reputable blockchains to say, “Bring your coins to our blockchain, where we have the same DeFi products and can offer you the same, if not better, yield at a fraction of the fees.”
What does this mean for you, the dad on his phone in the bathroom checking crypto prices?
4 Things Every Crypto Dad Needs to Do Before Investing in DeFi
1. Download Metamask, an Ethereum wallet that will allow you to invest, trade and swap.
2. Deposit or buy as much Ether as you want to invest. Do not buy just a little to test it out. You will get rekt with fees.
3. Just like you have Metamask and Eth, you will need a wallet and native token for each blockchain. At some point, you will need to swap your Eth for a different blockchain’s native token.
4. Buy a Ledger Nano X and use the Ledger Live platform to secure your crypto. PS: You can connect your Ledger to Metamask to easily trade.
I recommend reading 1inch Network’s post on DeFi that explains some of this in more detail.
Once you’ve gone through these steps, you are ready to actually deposit crypto into different DeFi financial products.
That’s all you need to know to get started with DeFi. Sit tight! In my next post, I will walk you through the applications that I use: 1inch, Maple Finance, Bender Labs, and Anchor Protocol.
Happy investing, Crypto Dads!