I recently decided I wanted to buy a new Tesla. When weighing my options on whether to lease, finance, or pay cash - I realized I may have a fourth option: decentralized finance. The thesis was simple: could I put the cash value of the car info DeFi and yield enough to completely cover the car payments?
The short answer is yes, if you have the cash to buy a car outright, it is possible to cover finance payments by yield farming the principle.
In this series, I will introduce the concept of decentralized finance: how it works, what the risks are, and what I believe is the current safest way to get a respectable yield from your dollars.
What is Decentralized Finance?
Decentralized Finance, aka DeFi, is a modern take on financial markets that remove centralized intermediaries such as banks, lending institutions, or exchanges. We could spend days talking about all the aspects of DeFi, but for this series, we will keep things simple and I will only introduce the concepts relative to our plan. Here are the first couple of ideas you need to understand:
One of the key components of DeFi is stablecoin. This is a cryptocurrency with a value tied to a fiat currency, ie: the US dollar, Euro, etc.
These coins can be used to buy other cryptocurrencies, but they can also be deposited (staked) into different DeFi protocols to earn yields, much like a savings account. Stablecoins have become one of the most fundamental pieces of all crypto markets. Some of the most common stablecoins include USDT, USDC, and UST. We can discuss the differences between these later in our series.
Staking is the process of earning rewards for depositing your cryptocurrency into the crypto equivalent of a savings account. The returns on single-sided stable coin staking can range from 2-3% up to almost 20%. There are many different staking opportunities out there, and picking the right protocol is crucial for you to feel confident in your investment.
Note: Staking is not to be confused with the similar process of “yield farming”, which I will introduce in a later article as a higher risk way to get yield from your cryptocurrencies.
Step 1: Choosing the right Protocol
Choosing the stablecoin you want to stake or farm is much like choosing which bank you want to buy a fixed income product from. Decentralized finance is still in its infancy, so as early adopters we have a lot to consider. For example, in DeFi not many protocols offer insurance on your deposits, something we take for granted in traditional finance. For this reason, investors should always be aware of the risks when investing in cryptocurrency.
There is a lot of information out there on staking, so here I am just going to focus on the platform I have found to be the best all-around solution, Anchor Protocol.
In part two, I will give an introduction on how to use Anchor Protocol to earn 19.5% APY on the UST stablecoin. Stay tuned!