After you’ve invested in some crypto fuel/infrastructure coins like $SOL, $LUNA, or $MATIC, the next step in your crypto journey is to make these assets work for you with Decentralized Finance, colloquially known as DeFi. This is where things start to get a little more challenging, but come along with me and you will make it through.

DeFi is an umbrella term for any application that applies blockchain technology to financial services like savings/lending (banking), money markets, stock trading, insurance, and more. There are also several crypto-specific DeFi project categories that do not exist in the traditional financial services world but nonetheless are considered part of DeFi: yield farming, decentralized exchanges, and launchpads.

Now I just threw a ton of terms at you, but don’t worry about the specifics of those terms — we’ll cover some of them in more detail in this story and the rest in future stories. The main thing you need to know is that DeFi is a movement that is creating the financial building blocks that you would need to manage your financial life entirely on the blockchain, with no banks, investment managers, insurance brokers, or other middlemen taking cuts along the way. With this technology, you’ll be able to make your money work for you and keep far more of the profits in the process.

What’s in your wallet?

We briefly defined a crypto wallet back in the first story of this series, so let’s get a little deeper into it, as your crypto wallet is where your DeFi journey begins.

In crypto, everyone’s funds are stored on the blockchain, a public ledger (or accounting) of transactions between anonymous encoded wallets. Your wallet is essentially just a special cryptographic key that maps to your funds on the blockchain, and only with that key can you make transactions from your funds. Using a crypto wallet is essentially like using digitized cash, meaning that only push transactions are supported, in other words you can only send funds/messages from your wallet and no one can pull funds from your wallet. You can read more about crypto wallets here.

With crypto, you don’t have to use a bank to store your digital money: you are the bank. Your wallet contains your cash, as well as tokens (which might represent investments, NFTs, or stakes in certain DeFi protocols).

The flip-side to this is that you have greater responsibility for managing your funds. Wallets have a “seed phrase” which is essentially a master password for your funds, such that even if you lose your wallet’s password, you can always recover your funds to a new wallet with this seed phrase. But if you lose that seed phrase and your password, you are screwed, so make sure you store your seed phrase in a secure place (ideally written down on paper and/or on a USB, stored in a locked fire-box in your home or other trusted location). You will also want to use a strong and memorable password for your wallet, as you will need to use it often to sign (authorize) transactions. In other words:

Wise words, Mr. Sheen.

So go ahead and create a wallet on the chain you’ve decided to invest in based on the last three stories in this series. For Terra, you can use Terra Station (download the Chrome extension, desktop app, or mobile app), for Solana, you can use SolFlare, and for Ethereum/Polygon, you can use Metamask. Once you’ve created your wallet, you need to transfer the crypto assets you purchased on the exchange to your wallet. Typically exchanges will lock withdrawals for a certain period of time to let your initial bank deposit fully clear, so you may need to wait a few days. You can keep reading today and then come back when your funds are clear.

Put Your Assets to Work Today

Staking/Delegating

For networks that run on a Proof of Stake consensus (every one of my recommended blockchains except Ethereum), the simplest thing you can do to earn income on your crypto assets is to stake them. These networks allow you to essentially lock up your gas coins (some have a lock-up period, some don’t) and put those towards the blockchain consensus process, and in return, you get to share in the transaction fees on that network and/or any gas coin inflation if there is some. You can then un-stake your coins at a later date if you want access to them to use or sell.

If you buy tokens for projects on the blockchain you’re operating on, such as a DeFi project, many will also have a staking mechanism which will let you partake in the project’s decentralized governance and the fees collected by the protocol. There’s a lot of variability here, so you’ll need to do specific research on whatever project’s tokens you’re considering.

For gas coins, you can stake $LUNA on Terra Station, $SOL on SolFlare, and $MATIC on Polygon’s staking site (note that staking $MATIC must be done on the Ethereum blockchain so it will come with Ethereum fees to stake/unstake).

Staking is typically considered low risk and low-medium reward.

Stablecoin Savings/Lending

This should be fairly familiar for most people; basically it’s like a decentralized savings account governed by code. You can deposit your stablecoins and earn an interest rate on them (often 3–10% depending on the protocol and market conditions). This is a great way to store your short-term savings that you cannot afford to lose value. There is some risk, but most of these savings protocols are designed in such a way that all the loans they give out are secured by depositors with other assets that can be liquidated in a non-payment situation. Be sure to do your own research on specific protocols.

On the other side, you can also be a borrower, in order to borrow from the depositors’ funds. I don’t recommend utilizing this unless you really know what you’re doing.

Here are some examples of quality savings protocols. For Terra, there’s Anchor Protocol. For Solana, there’s Solend. For Polygon/Ethereum, there’s Aave and for Ethereum specifically, there’s also Compound.

Depositing stablecoins is considered very low risk and very low rewards.

DEXes/Liquidity Pools

DEXes are a vital core of DeFi, and you can earn income from being what’s called a “Liquidity Provider” for their Liquidity Pools. These Liquidity Pools are basically pools of different kinds of assets (usually two assets) held in a specific proportion to each other (usually 50–50). The proportion of the assets in the pool determines the swap price of the assets, so if there’s 50 $ETH and 100 $USDC in a pool, then 1 $ETH would cost 2 $USDC.

These Liquidity Pools are made up of assets that individuals like you and I have given to them in exchange for tokens that represent our share of the pool. So if I provided 0.1% of all the assets in a given pool, I would get tokens that equal 0.1% of all liquidity pool tokens in existence for that pool. Over time, as people swap between one asset and the other (for instance providing $USDC for $ETH in the above example), a small portion of each swap is retained in the pool. And when I withdraw the liquidity I provided earlier after a certain amount of time, then I would end up withdrawing more assets than I originally put in thanks to those swap fees.

Obviously this means that your income potential from providing liquidity to these pools is highly dependent on both the size of the pool and how much trading volume is flowing through it. However, there is also considerable risk involved with these pools called Impermanent Loss. This is a topic that I will write a more detailed story about in the future, but the short version is that if you provide liquidity to a pool with two assets who end up wildly diverging in price, you are on paper losing money compared to what you could have had if you held the assets separately.

You need to compare the risk of this impermanent loss versus the incentives offered for liquidity providers to make an informed decision. There are too many DEXes out there to recommend any here, so stay tuned for a future story specifically about DEXes which will come with some recommendations. Plus, being a Liquidity Provider is a much riskier choice, and I wouldn’t recommend it for people who are totally new to crypto.

Providing liquidity with DEXes is considered high reward, high risk.

A Note on Incentives

If you’re investing in DeFi projects, most often there will be considerable incentives given to individuals who do specific things that are considered high-value to the ecosystem, such as providing liquidity to Liquidity Pools. You should always do your own research (and I will dive more into these things in future stories) when evaluating incentives, as sometimes they can end up losing value rapidly after certain events or based on how they’re structured, but often these incentives provide a nice boost in income or a greater ownership slice of the specific projects you’re investing in. I don’t really have the space to dive further into this in this story, but if you are interested in learning more, please let me know in the comments.

Yield Farming

Yield farming is essentially liquidity providing on steroids. Using code and auto-compounding logic, yield farming protocols allow you to super-charge your liquidity providing incentive yield by combining many individual people’s assets together and redeeming and auto-reinvesting those rewards back into the pool far more often than any individual is capable of. You need to be even more careful here, but these can really bring in some good income when you know what you’re doing. I feel like a broken record here, but I will write more about these in the future.

The life of a yield farmer ain’t glamorous…

What Should I Take Advantage of?

In your early crypto days, I would simply take advantage of staking for your long-term assets and stablecoin deposit protocols for your short-term savings. These two things are fairly safe and will already outstrip your typical bank savings by multiple orders of magnitude.

So once you’ve got your crypto gas coins on your wallet, figure out what you need to do to stake them. Separately, move some of your short-term savings into stablecoins, transfer those to your wallet as well, and put those into a savings protocol. I won’t go into details on how to stake, as there are many wonderful tutorials out there that are only a single Google away. Plus you gotta put a little work in here; I can’t do it all for you. ;)

The Three Pillars of DeFi

Before I leave you today, let me recap the most important facets of DeFi in a broader sense that make it truly revolutionary.

Your cash, savings, and investments all in one place

DeFi puts your financial life directly in your hands, as your own financial custodian, with all of your financial assets and liabilities living side-by-side with each other on the blockchain. Full control of your assets 24/7/365. Seamless transitions of funds from cash to savings to investments and vice-versa with no waiting times and minimal fees. No more waiting for bank transfers to clear, credit card fees, or stock market hours.

Buy or sell anything, no middlemen required

Without middlemen involved, you get to keep more of the profits from your money and investments, and as the crypto consumer economy (more on this in the final story in this series) develops, there will be more and more opportunities for you and I to build our own financial future.

A smoother and less expensive financial services market for all

The traditional financial services market is expensive to access, particularly for people from countries with smaller or less-developed economies. With crypto and DeFi, all we need to do to give anyone in the world access to a financial services market is to make sure they have internet coverage and access to a gateway from their local fiat currency to cryptocurrencies.

As of 2017, 2 billion adults around the world were estimated to be unbanked which means being able to bring digital financial services to those people will not only change their lives, but the world itself.

Challenge Yourself

If you’ve made it this far, congrats. This is not easy material to digest, despite how much effort I’m putting in to make it easy. If you’d like to challenge yourself, then I have a challenge for you: find a DEX for your chosen blockchain and research it a bit. Find its documentation and read around, see how much you can pick up, then send me an email at millan@digitalnativecitizen.com with what you’ve learned. And if you’re feeling a bit stuck or want some guidance, come back here and leave me a comment; I’ll help you out.

As I am not a registered fiduciary agent, none of my advice is legally binding in any way, and choosing to follow or not follow it is a responsibility that lies squarely on your shoulders. Crypto is a volatile market, and a significant crash in values is a normal event in this space, just as a significant increase in values is. Treat the market as an irrational actor (which is what it is), buy the proverbial dip when possible, take some profits along the way, and enjoy the ride.