DeFi is an acronym for “decentralized finance.” This means that financial services and products operate independently of a central institution such as a bank, lender or credit card company (thanks to the blockchain). With a DeFi wallet, users of "decentralized finance" can send and receive money, which is then stored on the blockchain and becomes accessible without going through an intermediary.
Why invest & trade in DeFi ?
First point, which today is often known to the general public, knowing where to buy and hold crypto-currencies can lead to very attractive passive income returns, rates can often be much more lucrative with crypto-currencies than with a "traditional investment". DeFi investing can include lending, trading or pledging (i.e. locking) your crypto in exchange for rewards and the ability to participate in liquidity pools where you can earn money on your participation.
In the end, this can look a lot like normal banking. Except that a world without intermediaries means more efficiency and less costs for everyone. That is, in an extreme world, everyone could have access to a loan, even those who don't have a bank account or don't like dealing with a traditional bank.
How to invest & trade in DeFi ?
You came to this article for this topic, here is the answer. There are 3 known ways to invest in DeFi: lending, trading and staking.
Crypto-currency users can earn interest by letting people borrow from them. This is called peer-to-peer (P2P) lending.
Through a decentralised application (dApp), you specify the desired loan amount and the type of crypto collateral you have, then follow an algorithm to find peers who can lend you the crypto money.
Similar to stock market investing, you can use platforms like Binance, Coinbase, Kraken (and many others), to buy and sell crypto currencies. Coinbase is the recommended platform for beginners.
Staking your crypto is a common buy and hold strategy to profit from your crypto.
In fact, staking refers to locking in crypto assets as a way to validate a particular DeFi protocol. Staking provides a service in the crypto world, similar to early investors in startups. Through staking, the blockchain is tested and the creative team uses these resources to make the protocol work. In return, when you stake, you earn interest.
Let's go further into the DeFi Trading part
As seen before, there are 3 ways to invest in DeFi, the most common is DeFi Trading. So let's go into details !
We can buy crypto in 3 different ways:
- by credit card
- by bank transfer
- by cash
Generally, a platform will provide a payment method.
Here are some examples:
- By credit card: coinbase
- By bank transfer : kraken
Always keep 2 things in mind when you invest in DeFi Trading:
- Beware of commissions
- Knowing how it works, there is a process for registering on platforms
Beware of commissions
A platform is a company so it has costs and must take commissions to exist:
- Visible fees (generally between 1 and 4%)
- Fees that are often invisible to beginners: the spread. A platform can increase the market price of cryptocurrency.
Note: the commission is lower when you make your purchases by bank transfer.
Knowing how it works, there is a process for registering on platforms
When we buy cryptocurrency, we systematically find the same onboarding process: registration, identity validation, harvesting the crypto.
Indeed, all platforms that sell crypto must ask and verify the identity of the buyer:
- Identification document
- Proof of address (not necessary)
- If you are buying a large amount of money (tens of thousands of euros), the platform may ask you a few more questions or even ask you where the funds come from
Bonus: you want to buy the cheapest crypto on the market? Use a Swissborg (platform comparator). Only by bank transfer.
To go further...
When you buy a cryptocurrency, it's important to know if you can believe in the technology. To do this...
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