Don’t believe the non-believers, there is a reason DeFi is trending right now. Of course, some of the more popular projects you’ve probably heard about are a tad overblown, but we won’t go into that (yet).
The fact is, people are excited about DeFi because of the resourcefulness, and most of all, the innovative solutions to long standing problems in both traditional finance and cryptocurrency. It seems like each new project takes it one step further, solving age-old problems with new solutions. Of course, one reason for its popularity is that any average user has the ability to make a passive income with crypto. In this article, we’ll give you some insight into some of these exciting new DeFi projects, and show you how to earn interest passively with each one.
What is DeFi?
If you don’t already know, or are having a hard time keeping up with all these new crypto-terms, you’re not alone. But don’t worry, we’re here to help.
DeFi, by definition, stands for Decentralized Finance and can incorporate any number of crypto-based projects that are actually decentralized, not partly or “halfway decentralized”. (We’re not even sure what that means.)
This necessitates a smart contract to run operations without the need for a third-party, or any party other than the users themselves. Cool concepts like governance tokens and liquidity pools have come into the spotlight lately thanks to UniSwap and the like, which really challenged the notion that crypto will never truly be decentralized.
So, the most popular projects in DeFi are lending protocols, although DEXs (decentralized exchanges) technically have more locked value due to the summer UniSwap craze. With high yields through interest and rewards, DeFi lending platforms, liquidity pools, and staking are just a few of your options. But with all the advantages of DeFi, especially in the case of lending protocols and staking it can be difficult to choose which project proposes the highest possible yields.
But first, what is the difference between lending protocols and staking?
Lending vs Staking
Staking cryptocurrency and utilizing a lending platform with a lending protocol to earn interest both generate the same results, but they have inherently different approaches and methodologies:
- Staking a Proof-of-Stake token helps validate transactions happening on a blockchain that runs the PoS consensus algorithm. This keeps the network protected, secure, and organized. You can also offer liquidity to that network, a la UniSwap, by staking an asset pair and earning yields based on trade volume. By staking in this way, you’re choosing to enter into a liquidity pool based on an asset pair, like ETH/DAI or ETH/USDC.
- A Lending Protocol is a blockchain protocol executed by a smart contract to lend out an asset to a “borrower”. Everything is done on-chain, so the typical lender doesn’t really have to worry about the back-end tech stuff too much. Just hold your digital asset in the platform’s wallet and a smart contract will do the rest.
What’s the difference?
Generally, people associate “staking” with the Proof-of-Stake consensus protocol, but more broadly, staking is the action of holding cryptocurrency in a wallet to support the operations of a blockchain network. When staking cryptocurrency, you are essentially opting to stake (generally a project’s native token) to earn rewards for your contribution.
Lending cryptocurrency employs a similar concept, the only difference is that rather than “lending” or holding a digital asset to assist in the operations of a particular blockchain, you’re holding it to earn interest from the platform itself. Tied into a lending protocol, these projects allow users to lend out their cryptocurrency and earn interest through their platform. A smart contract helps things run smoothly between the lending party and the borrowing party. It makes sure that the borrower pays interest on the borrowed sum, and that the lender gets that interest.
Luckily, users of either type of protocol need only to hold their digital assets in that platform’s wallet to accrue interest.
Between these two mechanisms for interest-earning, there are certainly quite a few DeFi projects vying for your attention. Some of them are worth it, while others are actually quite risky. As such, it can be hard to decide which projects are worth your time (and money) and which are worth running away from — fast.
Luckily, we’ve taken the liberty of highlighting each project’s features, and whether or not they’re worth your interest. (Get it?)
Crypto.com (CRO Token)
Crypto.com is a huge project that has plenty of potential solely as a lending protocol, but they also offer a plethora of services. This isn’t always a plus, but Crypto.com has a decent amount of followers, and their execution is both well-intentioned and effective.
Boasting an exchange, an app, a wallet, a staking mechanism, a physical credit card, a credit mechanism (with crypto as collateral), a utility token (MRO), a “cross-asset intermediary currency settlement” token (CRO), DeFi Swap… you get the idea.
They also boast a whopping 18% per year, which is quite high for the DeFi space. Depending on how much you put into it, and how smart you are with it, CRO can generate quite a return on investment.
SwanFinance is an up-and-coming DeFi project that can earn you 20% interest per year— currently the highest in the game. Falling under the “lending” DeFi sector, SwanFinance pays out interest on staked SWAN and on deposits of other cryptocurrencies, such as BTC, ETH, XLM, and USDT, through a smart contract. SwanFinance has mapped out an entire ecosystem of fintech services. In fact, SwanFinance features most of the current DeFi services and combines them all into one easy-to-use platform.
Including a mini incubator with SwanInvestments, an Exchange with Swan.Exchange, a DEX with Swan Credit, the ability to pay for goods with your crypto through Swan Pay, Swan Finance is aiming to provide these necessary services all in one spot. Check out their roadmap at swanfinance.io!
UniSwap has been the talk of the summer, currently ranking #1 by a whopping 19% at the time of this writing on defipulse. For good reason too, UniSwap has offered something so vastly innovative, that it probably needs a separate article dedicated to it. So, for the sake of your time, we’ll summarize.
A decentralized exchange (DEX) protocol, UniSwap also utilizes its own token, UNI. The token can be used to swap between ETH and other ERC20 tokens. Using on-chain reserves and automated pricing rather than the more traditional order book mechanism, Uni uses what’s called an automated market maker. Liquidity providers stake their funds to earn rewards and simultaneously help out the exchange. Under a traditional order book mechanism, both of these actions would be executed by a market maker.
By contributing to Uni’s liquidity pool, LPs earn a portion of the .3% fee that Uni requires it’s users to pay when swapping between digital assets. What they earn is proportional to their contribution to the pool.
Balancer is an AMM (automated market maker), and a non-custodial portfolio (and portfolio manager). Described on their website as “a protocol for programmable liquidity”, they also provide swapping, trade simulation and optimization, private liquidity pools, and more.
Balancer is an option for those who want to earn interest through liquidity providing or yield farming, but the way Balancer accomplishes this is a little more complicated than that — and miraculously — still equally passive on your end.
Since liquidity pools on balancer are fully customizable, there isn’t a traditional 50/50 split, or “two asset only” pool requirement. You can actually use two or more assets, and of any amount. Using what’s called Smart Order Routing (SOR), Balancer optimizes your positions automatically and pays you in interest for providing each market with liquidity! Pretty cool, right?
MakerDAO (you’ve probably heard of this one) flaunts an ecosystem of DeFi services. A brainchild of the Maker Foundation, MakerDAO has quite a reputable team. With stablecoin Dai and governance token MKR, MakerDao comes in a close second with $1.82B locked at the time of this writing.
MakerDAO is both an exchange and a lending platform, in which you can stake their stablecoin and earn interest. Called the Dai Savings Rate, or DSR, this interest rewarded to DAI holders comes from the stability fees from users borrowing DAI. The DSR helps promote demand for the stablecoin. The DSR has gone up a whopping 33 fold from March to May of last year, and is always set to change, depending on what governance token holders opt for.
Compound is an interest rate protocol built to be integrated into other platforms. According to their website, the Compound protocol is “built for developers, to unlock a universe of open financial applications”. In this way, Compound is similar to UniSwap, whose DEX protocol is also open-sourced — having been utilized by copy cat projects since its inception.
With a community of devs frequently building new services and interfaces using the Compound protocol, Compound is a diverse ecosystem of DeFi services. Their new governance token, COMP, is a recent feature, though it holds no financial value.
Compound finance’s protocol makes it so both lenders and borrowers can earn interest on stored digital assets. Here’s what their DApp looks like at the time of this writing, so you can get an idea of the kind of APY you’ll earn from lending (or borrowing) certain assets.
It’s always important to do your research on a project you’re interested in, especially in the DeFi space, where so many scammers and Ponzi schemers are just waiting to jump on the opportunity of a crypto-related craze. Do your research, check out the founders, give their websites, DApps, and DEXs a look over before using them. It’s also equally important to ask around on Twitter, Reddit, Telegram, etc. to get an idea of what others are saying about a project. Stay safe, and happy staking!
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Swan Finance is an exchange and a staking platform for lending and borrowing that utilizes Bitscanner to check for bugs and safeguard your crypto while you stake. Our trading bots can help you succeed in trades through a meticulous algorithm while our platform will provide users with the ability to make payments or transfer funds. Check out our project at swanfinance.io