The game of money is changing – so what is DeFi?

what is DeFi

Part 2 in our series DeFi: the new financial frontier

A new financial architecture is being built by super smart computer technologists and even some economists. It’s called DeFi crypto and it’s about much more than just crypto. It’s going to be bigger than Bitcoin. Perhaps even bigger than the internet V2.0. In fact, it’s the single most important thing you as a financial freedom seeker can get your head around – now. But what is DeFi? What does in mean for your financial freedom in practical terms?

Our DeFi: the new financial frontier series is helping financial freedom seekers understand the monumental shifts in the tectonic plates of our global money system. If financial freedom is all about how well you play the game of money, then that game just got new rules so stay tuned to this series as we explain them.

Who controls the ledger controls the money game

Ledgers have historically recorded financial and commercial transactions between people – the ‘who owns what when’ – since, well, a long time.  If you think about it, for any significant exchange of value, there’s a central record of the transaction kept by someone. Ledgers are more than just a record. They’re also about trust. An independent third-party bearing witness to the exchange of value between strangers and so on. Whoever controls the ledger has significant power in the game of money. Over the rules that is. How transactions must occur, between whom, and how much they cost.

So, who controls the ledgers? Middlemen such as banks, insurers, brokers, auditors and policy makers, and the institutions they have created do. And through this the centralised control of money has become the norm. But will it always be?

What is DeFi? The new rules of decentralised money

what is DeFi

DeFi is the decentralisation of financial products using blockchain technology.

DeFi uses Blockchain technology to replace the role of middleman in financial and commercial transactions and decentralise the control of money.

Blockchain was created to act as a ledger that no one entity could control but that needs the participation of many to operate. It seems simple on the surface but in its very design, blockchain technology fundamentally ‘up-ends’ the money game as its currently played. That’s why there is a lot of scrambling going on in the halls of traditional financial institutions, about Bitcoin and cryptocurrency. But cryptocurrency and bitcoin are just white noise once you step back and take a look at the bigger picture of Blockchain meets Money.

Blockchain meets money

Blockchain technology’s decentralisation of money – Decentalised Finance (DeFi) – will profoundly change our money future.  The changes have already started. The introduction of Blockchain technology to the world of finance is seeping into the money system under the cover of crypto and Bitcoin. Over the coming decade, DeFi crypto will likely impact the way you save, where you put your money, how you borrow, where and how you invest in assets, how you manage them, the stocks you buy, your retirement nest egg, your investment income and any trading you might do. Just about everything to with your money.

You see, Blockchain changes the money game in four critical ways:

  1. It acts as an immutable public ledger through which participants can validate transactions automating the trust element between third parties,
  2. Its design decentralises control over that ledger,
  3. it allows the tokenisation of assets by fractionalising ownership of those assets, and
  4. It transcends national borders, putting opportunity in the hands of the masses and millions of unbanked across the globe.

What does DeFi mean for your financial freedom?

The real-life impacts on your financial freedom due the structural changes being bought borne out through Blockchain and DeFi crypto are profound peeps! Here are just a few we can think of:

  • Faster financial and commercial transactions – blockchain now provides an easy way to send money quickly and cheaply across the globe
  • Fewer middlemen and rent takers = fewer fees and charges = you keep more of your hard earned assets
  • Lower barriers to entry – no minimum investment requirements for example that apply to some of the most profitable instruments in financial markets
  • Lower cost to buy in to financial opportunities so greater access to markets
  • Fairer ways to grow wealth
  • More transparency to replace the opaque rules that currently apply to the game of money – particularly gold investing, and
  • The biggest of them all: You get to control your money – no custodians, banks, no gatekeepers clipping the ticket or saying no to your financial future

The final word – may the odds be ever in your favour

I really want to focus on that last dot point because it is exactly what financial freedom is about. You taking control of your money. DeFi crypto can give you new tools to do exactly that – if you learn the rules of the game and get comfortable with the tech. Don’t be afraid, but do get educated. And do manage risk! The new game of money is here.  It involves investing in cryptocurrency and decentralised finance. As they say in the movies, may the odds be ever in your favour!

Check out part 3 in our DeFi series to see how to earn double digit interest on your money with DeFi crypto.

Until next time – have fun, be happy, do good!

The 2021 DeFi lowdown – time to pay attention peeps!

2021 DeFi lowdown
What is DeFi?

Part one of our DeFi: the new financial frontier series

Y’all know we’re passionate about financial independence, passive income and the FIRE movement. But not many of the leading FIRE blogs are talking about DeFi or decentralised finance. Well we at The Live Life Project think it’s time to pull back the covers on this new frontier of personal finance. Like all new frontiers, DeFI is a bit wild, wild west. So in this post we’ll explain what DeFi is, why financial freedom seekers should know about DeFi, and some passive income ideas from DeFi to get you started.

This is the first post on our DeFi: The new financial frontier series, where we will give you the lowdown on DeFi in 2021.

What is DeFi?

DeFi is a ‘peer to peer’ internet system of executing financial transactions. Transactions like lending or borrowing are performed directly between two parties using blockchain ledger technology. Transactions are executed by computer code, and secured by cryptography. Because it uses blockchain technology, DeFi is typically associated with cryptocurrency. Critically, DeFi is designed so it doesn’t require any middle men and gatekeepers like banks, exchanges and lenders. This means no more banks controlling our access to financial opportunities and earning a fat percentage profit of every financial and banking transaction we make.

To demonstrate just how DeFi has exploded, take a look at this graph of the total value of USD locked in DeFi. That number has skyrocketed from $914 million 12 months ago to more than $75 billion in 2021. And it’s still early days financial freedom seekers. You can also access a pretty reliable DeFi index here.

What is DeFi
DeFi explosion over the last 12 months. Source DeFi Pulse.

Traditional banking BS

I wanted to share an annoying bank anecdote that happened to us personally just this year to set the scene for ‘why’ DeFi. We have a couple of investment properties as I’ve mentioned and in March were in the process of selling our home. In addition to the owner mortgage against the home, we had a small equity loan of $60,000. Before we sold our home, we wanted to transfer the equity loan to one of our investment properties. We wanted to do this maximise the cash we have to buy our next home.The bank had valued the investment property as containing plenty of spare equity so easy peasy right?

When we went to the bank with this request, the answer was a flat ‘no’. But why, we asked? It’s just a matter of transferring the loan from one asset to another. The reason – there was no internal process to make this happen. Sigh. Because there was no process the bank required of us a completely new loan application on the investment property. This meant a total reassessment of our finances, tonnes of paperwork, another $500 in bank application fees, plus broker fees blah blah blah.

I bet most of y’all have a similar frustrating anecdote about unreasonable policies in getting financial services from traditional banks. We could all have a massive bank whinge-off into eternity. Yay us. But that’s the thing with decentralised finance, no more banks to deal with and more control over your equity and your money. Huzzah to that we say!

A new world of money?

DeFi is about more than just crypto. It’s an entirely new world of money. A new finance system built on trustless transactions that use blockchain and internet technology. Here’s a real world example of DeFI applied to lending. DeFi loan transactions are executed through what’s called ‘lending protocols’ like Aave, Maker or Compound. These protocols use ‘smart contracts’ – code on the blockchain – to execute a financial agreement between two parties when predetermined conditions are met. ‘What the hell….???’ I hear you say. Sounds like gobbledegook. But put simply, its computer code (program) to execute financial transactions on an immutable public accounting ledger (blockchain), so you no longer need a ‘trusted third party’ like a bank.

DeFi appears to be morphing into an alternate financial system with many of simple personal banking financial products offered by the traditional finance sector. Think borrowing, lending, term deposits and credit cards just to name a few.  But this all happens without the middle man taking a big fat cut of the profits or adding fees on fees. You see, instead of the bank paying you 0.5% interest on your hard-earned savings only to lend that money on for 3.5% themselves, DeFI gives you the option to provide the liquidity directly and earn the higher interest rate. And that’s just one example of why people have started moving to DeFi. DeFi takes on the role of banks, exchanges and insurers today—like lending, borrowing and trading. It puts this role in the hands of regular people like us so we have the opportunity to earn more from our own assets.

If you are sick of earning 0% interest on your cash or bemoaning the lack of options in traditional finance to earn income from your savings, then it’s time to pay attention to DeFi people!

Making passive income from DeFi

There are two low-tech, beginner level ways to make passive income from DeFi with interest rates well above anything you can get in traditional finance. We’ll go into these in more detail in our next posts in this series. But here’s a summary to give you some simple passive income ideas from DeFi:

Stablecoin high interest savings accounts

You can earn interest on stablecoins you own by depositing them with different crypto currency liquidity providers.  Stablecoins are cryptocurrencies that are pegged to and often backed by fiat currency – usually the US dollar. They’re called stablecoins because their prices don’t fluctuate as much as the prices of other crypto coins (they’re pegged to fiat that doesn’t fluctuate as much). Examples of popular stablecoins are USDT, DAI, USDC, TUSD.

Think of this product as a high interest savings account that you would ordinarily put your fiat dollars in, but with better rates than you can get from any traditional bank. Protocols or platforms like Aave, BlockFi, Gemini and Nexo offer stablecoin passive income products. Interest rates range from 2%, which is not really worth it, up to 10% or even more. You usually get paid in the same stablecoin you deposited.

To earn stablecoin passive income you buy the stablecoins with your fiat dollars on an exchange like Binance, Kucoin or Coinspot. You then set up an account with one of these liquidity providers and transfer or deposit stablecoins into that account and start earning. Some larger exchanges like Binance will pay you to hold your stablecoins in their wallet on flexible terms (unlocked).

Crypto staking 

Crypto staking is more like a term deposit for your crypto currency. You deposit your crypto coins into a staking wallet. The coins are used to support the consensus process (validating blockchain transactions) needed to run a particular blockchain network. Stakers need to hold coins in order to validate blockchain transactions, for which they earn incentives. The more coins they hold, the better. When you stake your coins in a staker’s wallet they can either be locked or unlocked. In return for staking your coins you receive interest. If your coins are locked, then they must be held there for an agreed time period or the interest rate is foregone – similar to a term deposit.

You can stake your crypto directly on some of the larger crypto exchanges like Binance, in a hard wallet with providers such as CoolWallet, Trezor or Ledger, or via a staking platform such as Stake Fish. It’s easiest to stake on an exchange if you’re a beginner. Just like term deposits, rates depend on the type of coin and the term of your deposit as well as other native factors. Read the fine print! You can get terms from one to 12 months routinely. You get paid in kind (the same coin you deposited) or in what’s called a token. Tokens are a form of reward for partaking in an activity within a blockchain. They are blockchain network specific but are often tradeable on cryptocurrency exchanges like Binance or Kucoin. You can trade your tokens for other coins or exchange them into fiat currency via these exchanges.

Staking is higher risk than passive income from stablecoins because you are exposed to the fluctuating market price of your crypto while it’s staked. Crypto coin prices are extremely volatile and can and often do move either up or down more than 30% in a single day. You’re looking to stake crypto coins that are in a long-term uptrend. This way, you benefit from both the coin price and the passive income.

The final word – managing risk

Like traditional bank savings accounts and term deposits, DeFi staking and savings products differ. But unlike traditional bank products the risks are much higher. It’s your responsibility to understand the product and the risks. Remember, decentralised finance is about you controlling your money. There isn’t the same government protection and regulation in place if things go awry. DeFi coin prices are more volatile and returns can fluctuate. You must be comfortable with this to invest. You must manage your risk, such as by only using well established platforms with cold storage security, diversifying across platforms, and sticking to core Stablecoins. If riskier investments are for you , you could allocate a nominal portion of your investment portfolio/assets that you don’t rely on for weekly income or retirement. Start small!

We’ll review which platforms and DeFi passive income products are best in 2021 in an upcoming post in this series so stay tuned financial freedom seekers!

Til our next post in this DeFi series – Have fun, be happy, do good!

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