Up and Running with DeFi

When it comes to decentralized finance (DeFi), you are in charge of your own money and assets. There is no centralized entity such as a bank that is being held accountable to manage transactions and protect your funds. When you are sending and receiving cryptocurrencies, it is utilizing a blockchain network. Not every coin supports every blockchain network, thus not every crypto exchange and wallet supports every coin. In centralized exchanges like Coinbase, they typically (not all) have measures that check and make sure things are compatible when withdrawing to a wallet address. Central exchanges are run like regular companies and have to protect the customers using their platform. When using a DeFi exchange (DEX), you can’t be sure that these checks are enforced because everything is handled programmatically, meaning its possible to send a coin to an incompatible wallet address and lose your funds forever. It’s crucial to recognize the most widely utilized blockchains below before jumping into the world of DeFi.

Leading Blockchain Networks

Bitcoin

• Token Standard: SegWit
• Native Coin: BTC

Ethereum

• Token Standard: ERC-20
• Native Coin: ETH

Binance Chain

• Token Standard: BEP-2
• Native Coin: BNB

Binance Smart Chain

• Token Standard: BEP-20
• Native Coin: BNB

There are several other blockchain networks, but these blockchains above have the largest ecosystems and are leaders in the crypto market. A lot of new coins/tokens you see actually stem from these blockchains. A coin may only support one of these networks, though some are created to be utilized on multiple blockchains. It’s similar to how your favorite app for iPhone may not be available on Android, or how a video game may be released for Playstation and Xbox, but not Nintendo.

Gas Fees & Global Markets

When utilizing these blockchain networks, fees or gas are needed to process transactions for approving, sending and receiving. The native coin of the blockchain network is used to pay for this. At the moment, Ethereum fees are incredibly high and costs dozens of times more to utilize it compared to other newer blockchains. Ethereum however, has been around the longest and is the most trusted and widely used network. The Ethereum foundation is currently working on Ethereum 2.0, which will provide several updates, including addressing the problematic gas fees.

Binance Smart Chain (BEP-20) has a rapidly developing ecosystem, you can buy it’s native token BNB at Binance.us, but you can only withdraw BNB over the traditional Binance Block Chain (BEP2), and there are only a small amount of platforms that utilize BEP-2 tokens. If you are not based in the US, then this is not a problem, as you can purchase BNB at Binance.com (Global), then withdraw BNB as a BEP-20 token. .

Wallet

Crypto currency wallets are becoming more advanced and many are able to support multiple blockchains. The safest way to store your crypto is a hardware wallet, but in my experience, there are compatibility issues when trying to utilize it with the hottest new dApps. Two of the most popular wallets are Trust and Metamask. The Trust wallet is Binance’s official wallet, and is primarily developed as a mobile wallet. Metamask is primarily used as a browser extension wallet. Metamask can utilize the prominent blockchains above, but to use it on Binance Smart Chain, you will need to follow some custom steps to configure it. Both options are safe as long as you do not reveal your private keys and do not install it on a computer or phone that may/can be compromised (has a virus on it or is a publicly shared device).

My preferred setup is to use Trust on a phone, you can connect to dApps and utilize them directly from within the Trust app itself, since it has a built in web browser with several links to dApps. Then if you want to use your wallet on a different computer, you can use the WalletConnect protocol, which Trust wallet and most dApps support. For example, to use PancakeSwap on your laptop, you will click Connect on the top right of the page, then you will select WalletConnect which will reveal a QR code. From within the Trust wallet, navigate to the Settings and select WalletConnect as well, then scan the QR code to connect, you should see all your balances on your laptop browser once connected.

Yield Farming

I have set up yield farms on different blockchains, utilizing some of the most popular DEX’s. The crypto market moves fast, and the pools and farms that I’ve set up may not be the most ideal by the time of this reading. These are investments that are suited to my own personal risk tolerance for short term profits, or coins that I believe in long term and want to make passive income on. I will describe my set ups for each blockchain below.

Binance Smart Chain Strategy

Overview
This strategy is focused around CAKE and BNB coin. CAKE is the native token of PancakeSwap, which is the most popular DEX built on the Binance Smart Chain. PancakeSwap pays you in CAKE, and their pools offer different yield rates for different coin pairs. When you add liquidity on PancakeSwap, you receive Pool Tokens that represent the amount of liquidity you’ve deposited. You can use these pool tokens to stake and farm more CAKE on PancakeSwap.

Strategy 1 — Multiplied Rates

Right now, setting up a CAKE-BNB pool yields a ridiculous 40x more CAKE, so I want to take advantage of this current rate because there is no guarantee on how long this will be offered. If both CAKE and BNB coin are doing well in the market, this strategy pays off handsomly. I consider this to be a medium risk strategy, because PancakeSwap is so widely used now, and the more CAKE you have, the more CAKE you earn.

In general I believe DEX native coins are good coins to invest in because they are needed to power their own DeFi ecosystem. As long as the DEX remains popular, there is strong incentive to own its native coin since yield farmers want to acquire as much of it as they can to take advantage of lucrative rates.

Strategy 2 — Long Term Passive Income

This pool will likely not pay as well as the other strategies as the current multiplier is only x1 and both coins are not as volatile, meaning that there will be less traders swapping from the pool, therefore less fees are paid out to the pool’s liquidity providers. I’ve chosen to pair BNB with ADA, which is the native coin to the Cardano network. If BNB is doing well and ADA is trading sideways, I may lose some BNB and gain more ADA due to impermanent loss, however ADA is a coin that I believe in long term, so I am fine with that.

ADA is a coin that is supported on multiple blockchains, thus it has a BEP-2 and BEP-20 version. You can send any version of ADA you have to a central exchange (if it supports the blockchain network), and it’s ticker symbol and integral value remains unchanged. For comparison, a coin like BTC is not supported on Binance Chain or Binance Smart Chain, thus you would need to aquire BTCB instead, which is a BEP-2 token that represents BTC and it’s price. To sell BTCB for USD on a central exchange, you would have to convert to back to BTC somehow or swap it for a different coin. Ethereum has it’s own version of BTC called WBTC, these are called wrapped tokens.

Strategy 3 — Hot New Coin

This is probably the riskiest strategy, so I allocate the least amount of capital towards doing this. The goal here is to select a newer coin that everyone wants a piece of. This is a coin that is likely not listed on big exchanges, meaning it may be only available on PancakeSwap or another DEX. When this is the case however, your share of the pool will represent a much larger percentage, so the fees that you are paid are substantial, not to mention the price climbs (or falls) much faster due to it being a small cap coin. The other risk to dealing with brand new coins is that there are unfortunately some people that are running scams. They may release a whitepaper that sounds like a nice read, but they barely have anything to show for the project. Make sure to do your due diligence before buying one of these coins. Some example questions that you may want to ask yourself before getting involved:

• Is this coin being actively developed with regular releases?
• Who are the developers behind this project and are they involved with the community?
• Does this project do anything different to set itself apart from other ones?
• How is this coin being marketed?

These are just a few basic approaches to investing into the DeFi space; the exciting thing about cryptocurrency is all the ways that it can be implemented. Blockchain technology is here to stay, and right now is an opportunity to start investing in the early stages of this space.