The quest for yield: How DeFi is creating new earning opportunities

The world of finance is in the midst of a transformative change, thanks to the emergence of decentralized finance (DeFi). Powered by blockchain technology, DeFi is a decentralized system that enables financial transactions to be conducted without the need for intermediaries.

With a wide array of innovative products, including yield farming, lending and borrowing, staking, and decentralized exchanges (DEXs), DeFi offers unique earning opportunities for investors. 

The importance of DeFi 

DeFi makes financial transactions far more efficient and cost-effective as it eliminates the need for intermediaries. With continued development in the blockchain space, this emerging space has given rise to numerous innovative products and services, including lending platforms, stablecoins, and liquidity pools.

DeFi products, including staking, lending, swap, liquidity farming, etc., provide novice ways for investors to explore various opportunities and earn yields. Here's a step-by-step guide to help you navigate the world of DeFi: 

Understanding DeFi

DeFi is a decentralized system that operates on blockchain technology, which is fundamentally different from traditional banking. The elimination of intermediaries makes it more efficient and cost-effective. DeFi is transparent and secure, and its smart contract technology ensures transactions are executed automatically once predefined conditions are met. 

Setting up a wallet 

Investors need to set up a digital wallet to store their crypto securely before diving into DeFi. While several wallet options are available, it is essential to choose a reputable one that provides robust security measures. Self-custodial wallets, where the user controls the private keys, are generally considered to be the safest option. 

Additionally, some wallets offer the ability to access thousands of assets via cross-chain and multi-chain interactions between protocols—useful for investors looking to explore various DeFi opportunities.

Learning how to invest in DeFi 

The next step is to learn how to use different DeFi services, including yield farming, lending and borrowing, liquidity mining, liquidity pools, and staking. Each option has its own set of risks and rewards, and it is crucial to understand them before investing. 

Yield farming: Yield farming allows investors to deposit money in a DeFi platform or protocol and earn interest in return. Unlike traditional banking, DeFi utilises smart contracts, where the deposited crypto is invested automatically, and the user starts earning interest. 

Lending and borrowing in DeFi: Users can lend their tokens or crypto assets to borrowers via dApps such as a DEX and earn yields from the interest paid on the loans. Yield farmers can borrow a token of their choice by providing another token in return as collateral. 

Liquidity mining: Liquidity mining is used for adding functionality to the crypto ecosystem. By lending assets to a DEX, users provide liquidity and receive rewards in return. 

Liquidity pools: Yield farming involves a liquidity provider (LP) and a liquidity pool—a smart contract filled with tokens. Think of a liquidity provider as an investor who deposits tokens into a smart contract to fuel liquidity. Yield farming works on the automated market maker (AMM) model, eliminating the need for the conventional order book, instead creating liquidity pools using smart contracts. 

Staking: Staking is of two kinds in the DeFi world. One is in the form of proof-of-stake blockchains, where users provide their tokens for consensus and network validation. In the second form, users stake LP tokens earned while injecting liquidity into the DEXs. 

Exploring DeFi projects 

After setting up a wallet and learning how to use different DeFi services, the next step is to explore different project dApps, which run on top of a blockchain network. 

DeFi projects offer various opportunities for investors to earn high yields. It is important to stay updated with the latest DeFi projects and their features. Some of the popular DeFi projects include Uniswap, Aave, Compound, and Yearn Finance, to name a few. Each project has its own set of features, risks, and rewards, so it is essential to do your research before investing. 

1. Uniswap: A decentralized exchange for trading cryptocurrencies and tokens. 
2. Compound: A lending and borrowing platform that allows users to earn interest on their crypto assets.
3. Aave: A lending and borrowing platform that enables users to earn interest on their crypto assets and access flash loans. 
4. MakerDAO: A decentralized platform that enables users to create and manage stablecoins backed by collateral. 
5. Curve Finance: A decentralized exchange focused on stablecoins trading. 
6. Yearn Finance: A platform that automates yield farming by aggregating DeFi protocols and optimising returns. 
7. Synthetix: A platform that enables users to trade synthetic assets that track the value of real-world assets, including commodities, stocks, and currencies. 

Exploring these projects can be a great way to discover new DeFi opportunities and earn passive income through yield farming, liquidity provision, or staking. However, it's important to conduct your own research and due diligence before investing in any DeFi project, as they can be highly speculative and volatile.

Gaurav Arora is the Senior Vice President - DeFi Initiatives at CoinDCX.