You’ve probably heard of crazy returns that people are making in ‘DeFi’. Here, I share a simple way to dip your toes into the world of DeFi. Do note that DeFi comes with risks and you should only invest money that you can afford to lose.
But first, what is DeFi?
Decentralised Finance aka DeFi is the umbrella term we use to refer to the large numbers of apps on crypto chains like Ethereum that fulfil financial purposes. Some examples include Decentralised Exchanges (for swapping/trading), Money Markets (for lending and borrowing tokens) and other forms of dApps.
DeFi rose to popularity because it puts the profits of financial banks, into the hands of the users of the platform by relying on a series of smart contracts to automate what was formerly, the bank’s job. It is possible to earn 12% lending USDC (a USD stablecoin) to other users on Money Market platforms, like a how a bank lends money to credit card borrowers.
All these activity takes place on smart chains, such as the Ethereum Chain, the Binance Smart Chain, or the Solana chain, among many others. Now anyone can move their money onto these chains and interacting with these apps to make money from DeFi.
Best blockchain for new DeFi investors: Solana Chain
Solana is a newly found chain that was launched in 2020. It has grown to be the 4th largest token currently, behind Ethereum & Binance.
It’s popular thanks to its high scalability and low transaction costs. Building on Solana also has a higher barrier to entry compared to other chains, leading to more stable and higher quality projects on it.
How to start making money in DeFi on Solana
To getting started on the Solana chain, you would require:
a FTX account (a centralised exchange)FTX is no longer safe, here’s what happened- a Phantom wallet account,
- and around 0.1 worth of Sol for transaction fees.
1) Purchase SOL on centralised cryptocurrency exchange
Simply set up an account on any centralised cryptocurrency exchange, I’ll be using FTX as an example in this tutorial.
FTX is the best exchange that you can access Solana with, offering SPL (Solana Program Library) withdrawals for many tokens.
Purchase 0.1 SOL on FTX ($20 as of writing)
2) Withdraw to wallet
Withdraw both SOL and USDC to your Phantom wallet:
Copy and Paste your Phantom’s address into the USDC address field. Take note that you have only 1 address for all your Solana transactions, withdrawing SOL or USDC to your Phantom wallet will use the same address.
However, take note that this doesn’t work for depositing into FTX!
Congrats! Your money is now on the Solana chain, in your Phantom wallet. This wallet is your identity on the chain, whoever who has your address can view your holdings (but can’t steal your money).
When creating your phantom wallet, they will generate a seed phrase for you. DO NOT LEAK THIS TO ANYONE. As your funds increase, I suggest getting a hardware wallet like the Ledger Nano S to improve your security. It would require physical authorisation like a bank token to move funds.
Then, let the fun begin.
3) Move funds to DeFi apps to start earning
You can connect your wallet to various DeFi Apps on the Solana chain and interact with them using your funds. Take note not to fall for phishing sites, and double check every website before you connect your wallet.
The easiest thing you can do now is to deposit your USDC into Solend, Port, Francium or Tulip for a yield of around 8-12%.
These protocols would lend your USDC to people trying to speculate and bet on rising prices with them, requiring borrowers to deposit collateral before borrowing. These borrowers would pay interest on their loans.
Their interest payments would be your returns.
2 Key Risks in DeFi
Why do these high returns on stablecoins exist?
While these rates are attractive, there still involves quite a significant increase of risk compared to SGD in a DBS bank account, and USDC in Tulip’s platform.
- Regulatory Risk
The biggest risk with these stablecoins vaults lies within the stablecoin, from regulatory sources. The Securities Exchange Commission (SEC) isn’t a fan of stablecoins, as they see it a threat to the US Dollar.
The SEC might clampdown on stablecoins, but that hasn’t happened yet, and with 100bil in circulation, USDC/USDT is pretty well established for now.
- Smart Contract Risk
When depositing into DeFi platforms like Tulip or Francium, there exists an additional risk known as smart contracts risk. These platforms rely on smart contracts to govern and automate their functions.
There have been many cases in the past where a bug in a smart contract allowed hackers to drain the entire vault. We can manage this by investing in protocols with large Total Value Locked (TVL), like Tulip at $1B TVL, or using platforms that are audited.
These aren’t failproof methods though, there have been audited platforms that was still drained.
Do your own due diligence, diversify your funds across platforms, and stay safe out there.
What’s next?
After getting the hang of simple lending protocols, start to read into the decentralized exchanges such as Raydium or Orca. These are the on-chain versions of FTX and is useful for you to get access or swap your tokens around without proceeding back to FTX.
These automated market makers (AMMs) are the base of DeFi, where most of the returns and yields come from.
Congrats! Your journey in the DeFi world has only just begun. You can join us in Metafrens (discord) to learn more.
