2 simple investments to beat your bank using DeFi

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NOTICE : This article does not constitute investment advice, financial advice or similar. Nothing in this article or on Digital GEMs constitutes professional and/or financial advice, nor does any information in this article or on Digital GEMs constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Please seek professional advice in relation to any financial or investment decisions.

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Inflation is up 7% in the UK and 8.5% in the US in March; your stocks and shares ISA has an average revenue rate of 9.5% per year over the past 10 years and it’s roughly the same for any Roth IRA account in the US.

I will let you do the math, but there is no need to say that hopes of making money through traditional saving accounts are lost for the year.

This is where DeFi comes into play! But what is DeFi ?

DeFi or decentralized finance is a fast-growing new ecosystem associated with financial services found on public blockchains such as Ethereum. It is a peer 2 peer system which means that exchanges happen directly between two individuals without the intervention of a centralized banking system. DeFi offers a digital, easy-to-access alternative to the traditional stock exchange and bank services such as investing, lending, borrowing, and saving. Often with higher revenues!

Total value locked into DeFi services (04/22, $bn); DeFi Llama

Here are the top 2 DeFi investments you should look into in 2022 to (potentially) beat global inflation, the stock market, and your bank.

Yield Farming and lending

Remember the dusty government bonds? Lending to governments so they can invest for you to get a tiny return on investment years later? Well, you can forget about it because yield farming exists! Instead of lending to a government, you can now become a liquidity provider and earn passive income. Yield farming basically means that one can lend money to a pool of liquidity and earn passive income by doing so. Liquidity pools allow cryptocurrencies pair to be tradeable with no delay. They are freely accessible reserves that contain the same amount of both assets constituting the pair facilitating the exchanges of capital on the market.

Let’s say somebody wants to buy the token X with the token Y. instead of waiting for another person to be willing to do the same in the opposite direction, liquidity pools of the pair X/Y filled by liquidity providers exist to allow the exchange to happen at any time. As a liquidity provider, you get paid transaction fees every time somebody uses the pool you are in.

https://zipmex.com/learn/what-is-liquidity-pool/

Becoming a liquidity provider is quite simple and can be very rewarding if you lend to the right pair. In fact, the remuneration of the lenders varies greatly according to the demand for liquidity of the pair. Therefore, investing in pairs with a lot of supplies can lead to an annual interest rate (APR) as low as 1% but for other tokens, it can go up to 70% APR like on most pairs on Pancaskeswap right now.

For yield farming, consider checking the most established Compound, Aave and Pancakeswap cited above.

Tokens, tokens, tokens…

Did somebody say tokens? For the most adventurous ones who appreciate risks, investing in various tokens in the early stages is the best way to make a lot of money in exchange for greater risk.

In fact, new web3 projects are born every day with their acronym batches of tokens to go with them. Most projects are focused on bringing improvements to the existing blockchains by reducing the transaction fees, or by expanding the size of a block so more transactions can happen in a shorter amount of time. Successful projects include Terra, a project that aims at creating stable coins similar to real currency to reduce the volatility of cryptocurrencies and make them more viable on a daily basis. The native token of this project called Luna has gone up more than 60000% in 2 years.

Terra’s project token Luna: https://www.cointribune.com/guides-crypto/guide-des-cryptomonnaies/terra-luna-tvl-record-de-20-milliards-de-dollars-depassant-binance-smart-chain/

This is too complicated and you don’t have time to look into serious projects? Memecoins are here for you. The best example to this day is the Dogecoin, popularised by Elon Musk’s tweets, this cryptocurrency does not have an underlying project. It was purely created for amusement and holds no utility value. But still, buying $100 worth of Doge back in January 2020 would have got you more than $7000 today!

So go ahead and be on the look for new projects to build your tokens portfolio.

To invest here is also pretty simple; this time you will be buying a token by exchanging the paired token in a liquidity pool to get your hands on it.

The trickiest part here is to navigate your way through the impressive amount of fake projects, scams and rug pulls that flood the market with no regulation to banning them. The market is now ruled by hype and marketing, and finding a legitimate long-term investment has become a challenging task.

In any case, bear in mind that all investment recommended above suggests buying tokens subject to volatility, variable APR, and impermanent loss. Invest at your own risk and do your own research before diving in!

So what aspect of DeFi do you consider trying next?

Let me know in the comments!

About this article

This article has been written by a student on the Grenoble Ecole de Management’s Advanced Masters in Digital Strategy Management. As part of a content creation assignment, students are given the task of writing articles based on their digital interests and disseminate the articles online. Articles are marked but we make minimal changes to the content. Thanks for reading! James Barisic, Programme Director, MS DSM.

NOTICE : This article does not constitute investment advice, financial advice or similar. Nothing in this article or on Digital GEMs constitutes professional and/or financial advice, nor does any information in this article or on Digital GEMs constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Please seek professional advice in relation to any financial or investment decisions.