Erik Weijers, 5 months ago
Few things are as opaque as the interest rates you are presented with in Decentralized Finance (DeFi). To understand whether the 34% you are promised is sustainable, you must understand where the rates come from.
Interest rates on a "traditional bank account" have been laughably low for years. No wonder many people have been licking their lips at DeFi and have indeed moved their funds over in part or in full. What explains the difference in interest between Tradfi and DeFi? First of all, the money market in this crypto world is not suppressed by a central bank that sets a sometimes artificially low-interest rate. In crypto, it is a purely free market.
Secondly, DeFi does not have to pay expensive intermediaries. Much of the revenue generated by trading can be distributed to the users/holders of the coins. Instead of an exchange where a central party manages the order books, it is the users themselves who put their money in liquidity pools and thus make mutual trade possible. For that service, they are paid transaction fees: this is a just and natural form of 'interest', often in the ballpark of half a per cent per transaction.
There are other understandable sources of real yield, namely:
Where you have to be careful is that the percentages mentioned with above mentioned liquidity pools partly consist of 'farming tokens' that you get paid. These are governance tokens of the DeFi protocol in question. The payout often decreases over time ánd the value of the tokens can drop rapidly. After all, it's just a token, not a dollar or BTC. So the promised 235% on a yearly basis is usually not going to happen... Of course, it can be a profitable strategy to get in quickly after the launch of a new DeFi protocol and sell that initial glut of farming tokens quickly. But it is not necessarily a sustainable strategy.
So it is good to consider what the ratio of payout in transaction costs to own tokens is for a DeFi protocol. If it is only own tokens that are the payout, you need to be careful. On Cryptofees.info, you can see which chains/protocols are most in-demand, as measured by the transaction fees users are willing to pay. A nice sign of actual adoption/popularity.
Thanks to Shivsak for his explanation.
Sep 29, 2022
Decentralized Finance is one of the most important technological developments in the recent years. It became so popular that there is even competition between different blockchain technologies and each one is trying to capture as much market share as possible. The most promising platforms so far are Ethereum, Binance Smart Chain, Cardano and Solana. Of course, there are even more blockchain technologies out there trying to built their own ecosystem, but in this article, we are going to focus on the most successful cryptocurrencies in this particular field and like to answer the question what DeFi really is.
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Maximal Extractable Value (MEV) is the (potential) profits for miners or validators producing blocks on a blockchain. They do this by picking and re-ordering transactions within blocks. You can view MEV as a tax on users of the blockchain.
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After the sanctions two weeks ago against mixer Tornado Cash, the discussion has flared up in the crypto world about how censorship-resistant crypto is. Addresses that were hit could no longer trade on Aave, for example. If it is already so easy to put down DeFi, what does this mean for the future of crypto? How censorship-proof are Ethereum and Bitcoin anyway?
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