My first exposure to blockchain technology was at one of the blockchain conferences held in 2016 in Dubai. Being based out of Dubai, you always happen to have access to some of the most exciting technology applications.
While reading in the news about the technology, I came across a senior executive’s quote from Dubai Blockchain Centre, this piqued my curiosity and I started to look further into it. The advantages of blockchain are several and well known, however as an individual I always wondered what does this mean to me, are all the blockchain related applications only for the B2B space?
As it turns out over the last two years, the most effective use case for blockchain is decentralised finance or DeFi as it is commonly known.
A quick search of this term and you will realise that decentralised finance is fairly simple and not that hard to understand.
In the traditional finance world or Centralised Finance (CeFi), you are able to save capital, deposit and withdraw, invest, lend and borrow, send and receive payments, maintain multiple accounts and so on.
All of these banking and finance activities are regulated depending on where you are. (In India, you have the Reserve Bank of India and are facilitated in a rule based framework. The three distinct entities in this activity are user, intermediary (bank) and regulator. The intermediary and regulator provide services for a fee, that is inbuilt in the financial system.
Decentralised finance is similar to the above system, except that it requires no regulator or intermediary. The function of regulation and the value added by the intermediaries is taken care of by demand and supply adjusting smart contracts, allowing for simple, transparent fee structures.
Hence DeFi brings in much needed financial inclusion, by making financial services more accessible, more efficient, less expensive and globally linked.
Has DeFi got you all excited and you want to give it a quick spin, here are four ways to get familiar with the space.
Lending and Borrowing
Lending and Borrowing, via projects like Maker DAO and Compound Finance. Maker DAO allows you to collateralise your existing Ethereum assets and then borrow against it. Since, crypto currencies are a volatile asset, the collateralisation cannot exceed 150%, i.e, the loan to value ratio is a maximum of 66.67%.
Just to ensure that you don’t get liquidated, it is recommended that you borrow about 40% against your ETH assets. So lets say you lock in 1 ETH that is worth USD 200, you should borrow not more than 80 DAI against it (at 40%), you are now able to lend this DAI that is generated in Compound Finance as well as several other protocols.
I have found this very interesting, at times, I have borrowed at 2.6% interest and lent at 9 to 12% interest per year, allowing for a clean interest rate arbitrage at virtually minimal risk. Of course, this isn’t financial advice and you must test out small amounts before going all in, with it. As a long term believer in ETH, this also allows me to continue HODling and enjoy the long term appreciation gains.
Purchasing Cryptocurrencies on Decentralized platforms
Most crypto investments are carried out on centralised exchanges such as Binance, Huobi, Bitbns, WazirX, Okex, etc. Centralised exchanges have been hacked and have a much higher fee structure. It is a significantly less expensive, safer and more secure to trade on decentralised exchanges. As a savvy crypto investor, I had a hard time, understanding the complex and difficult to navigate user experience on DEXes(decentralized exchanges) such as Idex. However, it has been significantly easier to trade on DEXes post the Defi revolution and all through an app. We built Frontier to make DeFi easy to access.
Various decentralised exchanges have different levels of liquidity and price, so no single exchange can be the most cost effective. Frontier’s native exchange compares rates across multiple exchanges and offers a seamless experience through the app itself. The purchased tokens appear in a few minutes in your wallet.
In my opinion, Binance understands that its centralised exchange business model can be disrupted and hence it has been encouraging and promoting its Binance DEX.
Invest in Asset Pools
Invest in asset pools via DeFizap: DeFizap allows you to invest in various asset in a particular ratio, so lets say, you have one ETH to invest in promising DeFi protocols, and you wish to gain exposure to multiple asset classes, as an early investor.
I recommend the SNX/ETH unipool, allowing you to instantly gain SNX and ETH exposure, as well as get access to the SNX rewards. This can be done on Frontier wallet mobile app.
Track and manage your DeFi portfolio
Now that you have lent/borrowed crypto assets, traded them on decentralised exchanges and invested in asset pools, it is time to keep an eye on your investments. As an early DeFi user, I had a few ETH spread out across various wallets and protocols. Not only was it confusing and inconvenient, but also time consuming. Portfolio tracking is an essential step in Finance and should be given as much importance even with DeFi investment.
There are several tools available now to keep track of it all. Frontier sends smart notifications such as the liquidation alerts for all the protocols and is able to value the assets on a real time basis.
DeFi In India
DeFi in India is truly coming of age. On March 04, 2020, India’s Supreme Court overturned RBI’s restrictions on Banking. This was a massive shot in the arm for blockchain developers, crypto traders, investors and the community at large. As per a World Bank report, of the 1.7 billion unbanked people around the world, a major chunk of them are from India (190 million) and China (225 million). Due to lack of formal banking facilities, in several parts of India, there are unorganised and often illegal investment schemes such as chit funds. Several of these such as Sahara have been shut down by the regulators. While, the government works hard to help the unbanked, DeFi perhaps can prove to be the game-changer, changing lives for the better.
Would you be interested in experiencing Decentralised Finance? Let us know in the comments below.
About the Author: Dhawal Shah is the Head of Business Development at Frontier, a mobile app that allows a novice to a professional make the most of Decentralised Finance, he can be reached at Twitter or via email. To learn more about Frontier, follow this twitter handle.
Update Note: Article added a section on DeFi in India and updated the author profile.