DeFi Guide: The

Blockchain-based
Decentralized Finance
Approach
2

TABLE OF CONTENT

Introduction.....................................................................................9
What is DeFi.............................................................................10
Origin of DeFi: How did DeFi start?..........................................10
What are the characteristics of DeFi?......................................11
Usability risk..............................................................................13
Risk of centralization.................................................................13
Liquidity risk..............................................................................13
Regulatory risk..........................................................................14
Collateral risk............................................................................14
Volatility risk..............................................................................15
Oracle Manipulation Risk..........................................................15
Smart contract risk....................................................................15
Ethereum dependency risk.......................................................16
Technical risk............................................................................16
Possible DeFi use cases..........................................................16
Lending.................................................................................16
Money banking services.......................................................17
Decentralized exchanges......................................................17
What are the challenges to be solved by DeFi?.......................18
DeFi Strengths and Weaknesses.............................................19
Strengths...............................................................................19
Weaknesses..........................................................................19
Alternative to FinTech...............................................................20
FinTech vs DeFi........................................................................20
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FinTech DeFi............................................................................20
Best current DeFi solutions......................................................21
Playing with DeFi and its huge returns (and its risks, of course)
..................................................................................................22
About the wallet to trade with PancakeSwap:..........................25
Steps to start trading once you have your wallet ready:..........26
DeFi Protocols and how they work...........................................27
Decentralized exchanges.........................................................28
Top decentralized exchange: Uniswap.................................28
Stablecoins............................................................................29
MakerDAO............................................................................29
Prediction markets................................................................30
Top prediction marketplace: Augur.......................................30
Asset Management...............................................................31
Ampleforth.............................................................................31
The future of DeFi.....................................................................32
How millions of dollars go up in smoke....................................32
Difference between DeFi and cryptocurrencies.......................33
The power of smart contracts...................................................34
The shadow of scams...............................................................34
Millionaire meme projects.........................................................35
DeFi boom - good or bad?........................................................35
What are the main advantages of DeFi?..................................36
What challenges does DeFi face?........................................39
How to get started with DeFi?..................................................40
Why is DeFi making massive progress?..................................41
Financial institutions are buying it.............................................43
Advantages of Decentralized Finance......................................44
4

DeFi offers more transparency.................................................45

Drawbacks and Risks of DeFi..................................................46
Risk of hackers.........................................................................46
What are Decentralized Applications?.....................................46
How dApps are taking over traditional finance.........................47
Key components of DeFi..........................................................47
DeFi Redefines Lending Solutions...........................................49
Compound: redefining lending..................................................50
Decentralized Exchanges: Bringing Tomorrow’s Traders
Together....................................................................................50
Uniswap: next step in the lending ecosystem..........................51
Next-generation savings powered by DeFi..............................51
MakerDAO: the king of decentralization...................................51
What the Future Holds for DeFi................................................52
Evolving DeFi to drive next-generation finance........................52
Merging traditional finance with the DeFi concept...................53
Is DeFi here to stay?.................................................................53
DeFi's future trajectory..............................................................53
What are the possible use cases for DeFi?..............................54
Lending and borrowing.........................................................54
Money banking services.......................................................55
Decentralized markets..............................................................55
FAQ...........................................................................................56
What are Stablecoins?..........................................................56
What is composability?.........................................................57
New DeFi applications for making money................................58
Yield farming.........................................................................58
Composability........................................................................58
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Money Legos.........................................................................58
DeFi money lending..............................................................58
Stablecoins............................................................................59
Prediction markets................................................................59
How can I make money with DeFi?..........................................59
Is it safe to invest in DeFi?.......................................................60
Is DeFi going mainstream, and when will DeFi go mainstream?
..................................................................................................61
How will Ethereum 2.0 affect DeFi?.........................................61
Bitcoin as DeFi..........................................................................61
Main DeFi cryptocurrencies......................................................62
What is yield farming?..............................................................63
How to get started in yield farming?.........................................64
Is cryptocurrency farming profitable?.......................................64
What is cryptocurrency farming and staking?..........................65
How do you grow a cryptocurrency?........................................65
The best platforms for yield farming.........................................65
Advantages and Disadvantages of Farming............................69
Platforms for Farming...............................................................70
Compound.............................................................................70
- Synthetix.............................................................................71
- Curve...................................................................................71
How Much Can You Earn From Farming?...............................71
What is Staking?.......................................................................72
How to Staking?........................................................................74
How to calculate the Staking rewards?....................................75
BlockFi: How does staking work?.............................................76
How to do staking in Binance?.................................................78
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Proof-of-Work vs. Proof-of-Stake.............................................78

Participating in Binance Staking...............................................79
Choosing the right cryptocurrency............................................80
Binance offers several options for staking................................80
Staking in ETH 2.0....................................................................80
Staking DeFi.............................................................................81
DeFi is also important...............................................................81
Where can I do Staking?..........................................................82
Being a self-employed validator............................................82
Participating in a Staking pool...............................................82
Staking in wallets..................................................................83
Staking in exchanges............................................................83
Conclusions on crypto staking..............................................83
Some DeFi platforms where you can earn interest in ETH by
practicing yield farming.............................................................84
Compound is the most accessible............................................85
Synthetix is a pioneer...............................................................86
Curve and REN fulfill the dream...............................................87
Balancer also has farmland......................................................87
Will FutureSwap also enter the rodeo?....................................88
What is Uniswap, and how does it work?.................................88
Traditional Markets...................................................................91
UniSwap Logic..........................................................................92
Liquidity Pools...........................................................................94
PancakeSwap: What is it, and how does it work?....................95
How to use PancakeSwap and CAKE Token...........................96
Agricultural production with PancakeSwap..............................98
Providing liquidity to PancakeSwap.........................................99
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PancakeSwap Rates................................................................99
Why rely on Binance Smart Chain (BSC)?.............................100
What is Sushiswap? A new term, 'Vampire Mining,' has been
born.........................................................................................101
Sushi Swap and decentralization...........................................102
Comparison with the traditional world....................................103
Operation of the Sushiswap protocol.....................................104
Distribution of Sushi Tokens...................................................104
What next?..............................................................................105
Top DeFi portfolios.................................................................106
What are Defi wallets?............................................................106
The best DeFi wallets.............................................................107
Top 5 DeFi Games to Farm NFTs..........................................111
What are NFTs?.....................................................................111
Node Runners.........................................................................111
What is Node Runners (NDR)?..............................................111
What makes Node Runners unique?..................................111
What was the distribution of NDR tokens?.........................112
Buy them with ETH.............................................................112
NFT Staking........................................................................112
Fighting villains....................................................................112
Blocking Villains..................................................................113
Player vs. Player Rooms.....................................................113
Cometh...................................................................................113
What is Cometh?.................................................................113
The MUST token.................................................................114
NFT Spaceships..................................................................114
DeNations...............................................................................114
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AnRKey X...............................................................................116
Chain Guardians.....................................................................116
What exactly are the types of assets?................................117
What makes ChainGuardians different from other crypto
gaming platforms?...............................................................117
So, is there a tab or something?.........................................118
Let's talk about the game mechanics..................................119
Top 5 exchanges to invest in cryptocurrencies......................119
1- Binance...........................................................................119
2- ByBit................................................................................120
3- CoinEx............................................................................120
4- Gate.io............................................................................120
5- Bittrex..............................................................................121
Decentralized Insurance.........................................................121
DeFi according to the World Economic Forum......................123
Conclusion..................................................................................126
9

Introduction
DeFi alludes to an ecosystem of financial applications that are
built on a blockchain. Their common goal is to develop and
operate decentralized, without intermediaries such as investment
funds, banks, or payment service providers.
However, because of the rapid and insurgent growth of the DeFi
platform, there are certain risks involved in the system that can be
challenging.
So much development has taken place in DeFi. Today,
Decentralized Finance is one of the fastest-growing sectors in the
blockchain and cryptocurrency space. With increasing institutional
acceptance, one may soon see DeFi integrated within the
traditional financial system in the future.
Starting from humble beginnings in late-2017, DeFi gained
traction in the broader community during the summer of 2020 and
has not stopped since; protocols in this space are constantly
innovating. In this book, we will help you delve into the world of
DeFi by categorizing the industry into concise chapters.
As previously done, we will be explaining what DeFi is, how it is
crucial for the community, and the various elements of DeFi, such
as decentralized stablecoins, exchanges, lending, derivatives,
and insurance. In each of these chapters, we will provide step-by-
step guides to assist you in interacting with at least one of the
DeFi protocols.
Throughout the book, we will provide detailed guidance on the
associated vulnerabilities or risks involved in decentralized
finance. We will also share materials that we believe will be useful
as you dive deeper into the DeFi ecosystem in these sections.
We hope that its content will help you get up to speed with DeFi.
10

What is DeFi
Decentralized finance or DeFi is a blockchain-based solution that
offers open and flexible solutions as an alternative to the financial
system. The main objective is to make conventional financial
elements gain transparency, ease of use, and decentralization.
It is the name given to the ecosystem of financial applications built
on the Ethereum blockchain and other cryptocurrencies. DeFi
(Decentralized Finance) seeks to create a financial ecosystem
radically opposed to the current one, based on open source, free
access (permissionless), and transparent.
DeFi is nothing more than smart contracts, lines of code that
establish a series of actions and conditions. Smart contracts are
executed within the blockchain of a cryptocurrency. Currently, the
Ethereum blockchain is the most widely used for creating smart
contracts, in general.
DeFi eliminates the need for trusted third parties and
intermediaries, eliminates paperwork, and generates a secure
and agile decentralized finance system.

Origin of DeFi: How did DeFi start?

DeFi was developed to create a financial system that is open to
all equally and minimizes the necessity to trust and rely on a
central authority for governance.
DeFi provided many chances to achieve a transparent and robust
financial system that no single entity controls. But the high point
for financial applications began in 2017, with projects that
facilitated more functionality beyond simply transferring money.
Financial markets can generate great ideas and drive societal
prosperity. Still, power in these markets is centralized. When
individuals invest in the current economic system, they give their
11

assets to intermediaries, such as financial institutions and banks;

this keeps risk and control at the center of these systems.
We have seen bank institutions failing to see the market's risks
throughout history, as seen in the 2008 financial crisis. Indeed,
when central authorities control the money, risk accumulates at
the center and endangers the system as a whole.
BTC and early cryptocurrencies were initially developed to give
individuals complete control over their assets, decentralized in
issuance and storage. Supplying access to a broader set of
financial instruments remained a challenge until the emergence of
smart contracts enabled DeFi.
To find the origin of DeFi, we must take a short trip back in time,
and we must go to the year 1995. This year, Nick Szabo, an
American cryptographer and computer scientist laid the
foundations of smart contracts. A solution that later served for the
development of Bitcoin and many other things. We could even
say that the first DeFi developed is Bitcoin.
If you want to buy cryptocurrencies, we recommend you do it with
Binance.
The problem lies in the fact that Bitcoin smart contracts are
difficult to program and have limited capabilities. This is precisely
what Ethereum has come to solve, allowing the creation of smart
contracts in a much simpler and richer way. Ethereum specifically
can support more complete smart contracts, which has led to the
development of different solutions, including DeFi.
The first DeFi solutions are liquidity markets, lending systems,
and decentralized exchanges. These first solutions based on
smart contracts start to be developed between 2018 and 2019, in
early 2020, when DeFi solutions are exponential.

What are the characteristics of DeFi?

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Let's see what essential characteristics of the decentralized

finance ecosystem are:
- Non-manipulable: being integrated within a blockchain ensures
that no misuse or manipulation in favor of one of the parties can
occur. Once the smart contract is on the blockchain, it cannot be
altered, or at most, deleted if the function is enabled.
- No third parties: Its operation does not require reliable third
parties to verify what is happening. The operation is verified by
the blockchain itself, more specifically by the mining nodes and
validators.
- Security: cryptography and consensus rules of a blockchain
add security elements. All nodes keeping a copy of the smart
contracts (since they keep a copy of the blockchain) eliminates
the possibility of tampering.
- Accessible: One of the characteristics of DeFi is that it is
accessible to everyone from anywhere in the world. This allows
people who are not allowed or cannot access conventional
financial systems to access a more flexible and agile economic
system.
- Transparency: Any transaction in DeFi is easily audited thanks
to the fact that they are based on blockchain technology. All
movements can be seen.
- Decentralization: As they are stored in the blockchain, their
operation is decentralized, not governed by the rules of countries
or governments. The operation of these is autonomous and
automated once deployed.
- Open source: DeFi is based on open source code, allowing
anyone to read it and verify that it does not have security
problems. Additionally, this code can be downloaded, used, and
modified for other applications.
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Usability risk
- A major weakness mainly related to the technical
implementation is the usability or user experience of DeFi
protocols. These are often unintuitive, complicated, and designed
for native cryptographic users. These projects have struggled to
gain traction beyond those intrinsically familiar with Ethereum.
Many products require users to manage multiple tokens within
their non-custodial wallets.
- Realistically, it is still too early for the mainstream audience to
risk their money in this complicated and uncharted zone. Once all
the technical and regulatory risks are addressed, the user
experience of DeFi products will undoubtedly be a top priority for
developers.

Risk of centralization
- Many DeFi applications were launched by a particular team or
company and are far from genuinely decentralized. Although once
established, they generally aim to decentralize governance and
decision-making. Whenever an application is semi-centralized,
there is counterparty risk, and the intermediary who has control
over the assets can use the funds maliciously.
- On the other hand, once these DeFi projects grow in user base
and locked assets, they will fall under stricter regulatory scrutiny
and financial oversight. Financial regulation will require a certain
degree of accountability and competent counterparty, which, in
turn, could generate a push back towards more centralized
management of DeFi projects.

Liquidity risk
- Liquidity is critical to efficient pricing in the financial industry.
Currently, liquidity in DeFi protocols is vastly outpaced by central
14

alternatives, with many low-fee liquidity providers stabilizing

traditional financials. Liquidity risk is related to technical risks like
technical scalability and congestion issues mentioned above on
the Ethereum platform.
- In times of crisis, the Ethereum network becomes so congested
that arbitrageurs and liquidity providers cannot keep prices in line
between venues, leading to massive dislocation on individual
exchanges, which triggers uncertainty and markets fall.

Regulatory risk
- Decentralized projects operate without a license in most
jurisdictions, regardless of where the end-user is located.
Concerning taxation, the management of DeFi assets is also not
clearly defined in most jurisdictions.
- Just as regulators worldwide are addressing regulatory issues
concerning cryptoassets, such as establishing new licensing
regimes for crypto custody. The Libra association, forgoing a fully
permit less political and regulatory pressure system, appears to
support these ideas.

Collateral risk
- There are certain risks involved in some forms of collateral to
secure loans. Over-collateralization vastly reduces the risk of
volatility. This requirement does not assure complete coverage of
the loan amount if the price of an asset falls too quickly.
- DeFi assets and products will undoubtedly fall under increased
regulatory scrutiny as the user base, and locked-in assets will
continue to grow. Financial regulation will necessarily require
some form of the accountable counterparty, making truly
decentralized governance and decision-making processes for
DeFi inventions not yet imaginable!
15

Volatility risk
- A distinctive point is the volatility of interest rates on many DeFi
platforms, which creates questions about the meaning of
participating in them. There will likely be agreements to replace
the floating interest rate with fixed or other rate-setting methods
for an additional fee. This also introduces difficulties in the overall
process.
- Today, DeFi's activity is approximately 1% of the total
cryptocurrency market activity, which in itself is small compared to
the global financial markets.

Oracle Manipulation Risk

- Blockchains rely on oracles to obtain information from external
sources. At DeFi, the most considerable reliance on oracles is
price information. The markets determine the price of ETH
compared to the Ethereum blockchain itself. Therefore, price data
is fed by oracles. The oracle can be the average of multiple DEX
or exchanges, DEX such as Uniswap, or an Oracle service such
as Chainlink.
- Oracle manipulation becomes risky when a DeFi dApp uses only
one exchange, or perhaps even two exchanges, as the oracle.
Traders can manipulate the price information an oracle provides
by negotiating a significant enough transaction to influence the
price.

Smart contract risk

- One of the cons of decentralized finance is that it relies a lot on
the integrity of smart contracts and the underlying blockchain
protocol applied. A flaw in the code could lead to a hack and
massive losses for users of a decentralized application. It is
16

almost impossible to code without errors, especially if future

developments in the blockchain protocol are to be considered.
- In addition, detecting errors in smart contracts is a rather
complicated endeavor, partly due to the newness of the
technology and the lack of standardized procedures.

Ethereum dependency risk

- DeFi is heavily dependent on Ethereum. Scalability is ETH's
biggest weakness, with transaction speeds of around 15 TPS the
norm even now, more than five years into its lifespan. In addition,
Ethereum is struggling to keep up, as stable coin transactions
dominate network traffic.
- The long-promised ETH 2.0 upgrade may solve the problem, but
full implementation still seems to be a few years away. So, for
now, DeFi's reliance on Ethereum remains on the list of
vulnerabilities.

Technical risk
- Technical risks related to the underlying blockchain protocol
(layer 0) must also be taken seriously. Almost all relevant DeFi
projects are built on the Ethereum blockchain. Ethereum has
faced some clogging issues in its blockchain that are related to
high usage.
- The transaction can remain pending if the network receives
traffic, ultimately resulting in market inefficiency and information
delays. These technical scalability issues are mainly related to
liquidity risks.

Possible DeFi use cases

Lending
17

Within the DeFi ecosystem, we find open lending, which is quite

popular. This mechanism of decentralized borrowing and lending
provided advantages over conventional credit systems. Instant
settlements of transactions, more remarkable ability to
collateralize different digital assets, the removal of credit controls,
and possible future standardization can be added.
As this lending system is based on a public blockchain, the
amount of trust required is reduced by relying on cryptographic
verification methods. Lending markets embedded in blockchain
technology minimize counterparty risks. They also make
borrowing and lending cheaper, faster, and more widely available.
Money banking services

One of the best solutions developed in DeFi is the issuance of

stablecoins, mortgages, and insurance. These money banking
services are one of the possible uses of these decentralized
finances.
Interest in stablecoins has grown quite a bit, as these are fixedly
matched to the price of a real asset. An example would be the
USDC, a stablecoin whose unit is worth $1 (1 USDC = 1 US
dollar). These currencies protect holders from the abrupt
fluctuations with cryptocurrencies, even being adopted as a
payment method for everyday use.
They can also be used to obtain mortgage loans, which are often
complex, expensive, and really slow. DeFi can create smart
contract solutions that reduce the time, cost, and complexity of
obtaining such loans.
Decentralized exchanges

The creation of decentralized exchanges (DEX) is one of the first

DeFi solutions developed and the most significantly developed
projects. These platforms allow users to exchange tokens and
18

cryptocurrencies that are operating within the same blockchain.

For example, a DEX within the Ethereum blockchain allows
exchanging ERC-20 tokens and ether (cryptocurrency of the
Ethereum blockchain).
Typically, DEXs have very low or no commissions when it comes
to exchange between tokens. This is one of their strengths
compared to centralized exchanges, which usually charge "high"
fees for each transaction.

What are the challenges to be solved by DeFi?

Although the proposal is exciting and seems promising, it
currently presents the following problems:
- Low processing capacity: Cryptocurrencies currently have a
limited transaction processing capacity, which is something they
are working on correcting. Bitcoin supports between 5-8
transactions per second (tx/s), and Ethereum supports between
12-20 tx/s, much less than services such as Visa, which would
support about 40,000 tx/s. For DeFi to work, cryptocurrencies
must scale in the number of transactions per second that they
support
- Risks for the user: DeFi eliminates intermediaries, just like
cryptocurrencies, so the user is solely responsible for everything
that happens. It is necessary to create DeFi structures that
minimize the risks of possible errors or lack of knowledge of what
is being done.
- Unintuitive: DeFi applications are currently complex and require
the user to make a lot of effort to understand what they are doing.
If these solutions are a real alternative to the financial system,
they must benefit the user, making them simple, intuitive, and
easily usable.
19

- Chaotic ecosystem: One of the main problems today lies in

finding a mechanism that adapts to every need. The user has the
task of diving into this complex ecosystem to find the solution that
suits him best. The need to build comprehensive DeFi solutions is
one of the challenges facing this ecosystem.

DeFi Strengths and Weaknesses

DeFi is currently an ecosystem in a primary development phase,
and many aspects need to be corrected to make it accessible to
all users.
Strengths

- Facilitates access to financial services for people who are

currently unbanked. It is an excellent opportunity for people's
economic freedom.
- It simplifies the financing process for companies and different
types of projects. Through DeFi, development and financing can
be offered in areas or to companies that might otherwise have a
challenging time.
- They offer security to all parties since it cannot be modified once
the transaction is validated. This ensures that no clauses are
added, or aspects are modified at will or in favor of one of the
parties.
- Smart contracts offer great versatility and ease of creating
different solutions. Anyone can write a smart contract or simply
access the code of a smart contract and adapt it to their needs.
Weaknesses

- Interestingly, smart contracts, which are a strength of DeFi, are

also a weakness. A smart contract is just a code written by a
programmer and may contain errors. It is vital to properly audit a
20

smart contract before deploying it to avoid problems like the one

that happened with The DAO.
- If there is one thing a financial system needs, it is stability, which
is difficult in the cryptocurrency segment. The current
mechanisms to create a stablecoin are not perfect and sometimes
may not protect from fluctuations. MakerDAO and DAI, whose
correction variations have evidenced that there may be
weaknesses due to protocols that are not mature.
- Transaction processing capacity of blockchains today. Ethereum
has suffered congestion on its blockchain on several occasions
due to the large volume of transactions by DeFi. Emergency
mechanisms have been devised that have yet to be implemented,
and we do not know how they will work. An increase in
transaction processing capabilities is required for DeFi to be
viable.

Alternative to FinTech
Financial Technologies (FinTech) are an attempt to update the
conventional financial system. They seek to develop a digital
financial system that can reach many people while offering a fast,
efficient, cheap, global, and simple management system. An
attempt that had its beginnings in the last years of the twentieth
century pointed out ways but ended up falling by the wayside.
In 2008, a certain Satoshi Nakamoto, with his proposal for a
digital currency between peers based on cryptography, made
FinTech practically obsolete. The launch of Ethereum and the
beginning of the development of DeFi systems have already put
the nail in the coffin of FinTech. Creating a decentralized financial
system that is more secure, borderless, and, above all, does not
require trusted third parties.

FinTech vs DeFi
21

FinTech DeFi
- Management and control Governments and banks Decentralized
- Trusted Banks and "trusted" third parties Community
- Fiat Economy Cryptocurrencies, tokens, stablecoins
- Lending Banks and other lenders Tokenized Debt
- Centralized markets Cryptocurrency exchanges
- Regulation States and regulated bodies Consensus
- Average times Very short
- High Costs Low
- Usability Simple Relatively difficult
- Requires permissions for use
- Censorship resistance
- Auditable Transactions and code are not public Transactions
and code are public

Best current DeFi solutions

Many projects have been developed to offer DeFi solutions
accessible to all users. Some of the most important ones are:
- Bisq: P2P exchange protocol that has been developed for
Bitcoin and is fully decentralized.
- Bancor: Decentralized token exchange based on Ethereum.
- 0x: Protocol for creating P2P-like DEX that runs on the
Ethereum blockchain.
22

- Kyber: Exchange protocol for integrating variation functions

between applications with cross-chain operations (between
different blockchains)
- Curve: Decentralized exchange specialized in stablecoins.
- RSK: Set of services and protocols for the development of a
complete platform. It includes smart contracts, digital identity,
instant payments, cross-chain bridges, the creation of
decentralized markets, and other elements.
- SushiSwap: It is a DEX for the creation of an automated
marketplace created on the Ethereum blockchain that has a token
of its own
- Shiba Inu (SHIB): is an ecosystem of solutions under
development that includes several types of fungible tokens, and
an NFT platform, and a DEX that are in the development stage

Playing with DeFi and its huge returns (and its risks,
of course)
You may have already noticed that when we talk about
cryptocurrencies, the concept of decentralization gains a lot of
strength, it is one of the desirable characteristics when thinking
about having complete freedom to dispose of money and to
transact without the intervention of a central entity that can make
decisions that affect our assets or our transactions. That said,
real, pure decentralization is not always present in crypto
platforms, even if they advertise it. In each case, it is necessary to
analyze what the projects depend on and who controls those
factors on which they depend.
But let's throw a blanket of pity on the pure concept of
decentralization and think about these DeFi projects, which offer a
whole series of financial services through platforms that have an
23

automated operation where you operate anonymously. Below we

leave you with resources about smart contracts and the
blockchain technology that underpins the whole DeFi machinery.
It seems evident that we are contemporaries of great changes in
everything related to money and investments, until recently it
seemed unlikely to operate at any time and from anywhere
anonymously (whether 10 dollars or thousands and thousands) in
a universal market that is always open, interacting with automated
systems, without the intervention of any human being and without
the need to have given our personal data.
Not only that, but these DeFi platforms often offer investment
opportunities with returns above 100% per year, but BEWARE:
they are operations that we consider high risk, below we explain
why.
Let's take the case of PancakeSwap, which runs on the
blockchain of the cryptocurrency giant Binance. This platform was
only released in September/2020. The creators are anonymous.
To operate with it, you link a wallet, such as Metamask. In literally
two minutes, you can start trading without having created an
account and without even having to inform your email (below, we
leave instructions on how to download the wallet and connect it to
the Binance network).
Among the various options offered by PancakeSwap, we can
"deposit" cryptos for as long as we want, and they pay us a
return. For example, by depositing their token called CAKE, they
are currently calculating a 123% annual yield, i.e., they estimate
that if you deposit 1,000 CAKE, you would have 2,230 CAKE after
one year. This yield is recalculated and may vary throughout the
period in which you leave your cryptos deposited.
Here is an example of the calculations considering an investment
of U$S 1,000 and a CAKE price of U$S 20:
24

Period ROI Profit in CAKE Profit in USD (at the initial price) Profit
in USD (if the price increases 50%).
1d 0.22% 0.11 2.20 3.30
7d 1.56% 0.78 15.60 23.40
30d 6.84% 3.42 68.40 102.60
365 d (APY) 123.93% 61.97 1,239.30 1,858.95
That is, if the price of CAKE does not change:
In 30 days you get profits of USD 68.40, a 6.84%.
In 365 days, you earn USD 1,239.30, 123.93%.
Interesting, isn't it?
But remember that we commented that we see several risks:
Failure in smart contracts, hacks, etc.
Problems with the website (for example, I seem to remember they
were victims of DNS hijacking).
Problems with the network. We commented that they are based
on Binance Smart Chain. If the network has issues, this platform
is running on it too.
Drop at the price of the token that we deposit. In the previous
example, we mentioned the CAKE token. We can win or lose
according to its cost in U$S goes up or down. It has been
variable, look, there are prices of all colors in a short time U$S 9,
U$S 44, U$S 16:
We point out the risks we see not because we are detractors of
DeFi or PancakeSwap specifically, but because we want you to
be well aware of the risks involved if you are tempted to try this on
the promise of such exceptionally high returns.
25

There are other ways to bet on making profits in cryptos (you

have to see in which unit of measurement you consider your
earnings, if in cryptos or FIAT currency such as dollars or euros).
One can buy and hold, that is, keep the cryptoassets and wait for
them to rise, trade with a platform such as Binance, arbitrage with
purchases and sales in an excellent P2P platform such as Paxful,
deposit the cryptos in a centralized platform that pays us returns
for it, etc.
Always keep in mind the phrase "Not Your Keys, Not Your Coins"
when you send your cryptos from a wallet that you control to a
platform, exchange, or wherever, that is, when you stop having
the private keys of your cryptos, you may lose them. If the
platform in which you deposited disappears and is hacked, the
government prevents it from operating. You risk losing your
cryptoassets.
We are curious; we are intrigued to know how far DeFi will go. We
are doing some tests to learn and understand more about the
subject.
We welcome the fact that new ways of managing finances are
being studied. We will see if this is the way to go; the other way,
the traditional way, would not be giving the best results for
everyone.
We repeat, EYE: these are operations that we consider to be high
risk.
Practical issues:
As the title of the post says, we are just playing with this, we are
no experts, but we leave you below some practical issues in case
you want to play a little too (always keep in mind the risks).

About the wallet to trade with PancakeSwap:

26

You can download the Metamask wallet from its official site:
https://metamask.io/. We found it more convenient to use it as a
Chrome browser extension than as an app.
The procedure to install and create the wallet is quite intuitive.
Anyway, we leave you a guide in English:
https://academy.binance.com/es/articles/how-to-use-metamask.
Other wallets (Binance Chain Wallet or Trust Wallet) already have
the Binance Smart Chain (BSC) network-enabled by default, but
in Metamask, you still need to add it manually. To do this, go to
"Networks," then to "Custom RPC."
And there they register the Binance Smart Chain (BSC) using this
information:
Network name: Smart Chain (or whatever you want to call it)
New RPC URL: https://bsc-dataseed.binance.org/
ChainID: 56
Symbol: BNB
Block Explorer URL: https://bscscan.com

Steps to start trading once you have your wallet

ready:
To trade with PancakeSwap, you have to pay transaction fees.
They are very, very cheap and are paid with BNB, the Binance
token. For example, if you have USDT in Binance, you can buy
BNB with them: https://www.binance.com/es/trade/BTC_USDT?
layout=basic&type=spot.
Then they have to get them to the wallet they will use with
PancakeSwap, for example, Metamask. For this, they copy the
address to receive from Metamask and then withdraw BNB from
27

Binance to that address:

https://www.binance.com/es/my/wallet/account/main/withdrawal/cr
ypto/BNB.
Then they can Swap into PancakeSwap and exchange BNB for
the CAKE token: https://exchange.pancakeswap.finance/#/swap.
To access PancakeSwap Pools and deposit CAKE to get a yield:
https://pancakeswap.finance/pools
ttps://academy.binance.com/es/articles/a-guide-to-pancakeswap-
We explain how Ethereum 2.0 can improve the scalability of your
blockchain.
All this practically idyllic environment of DeFi has the big problem
of the scalability of the different blockchains. Until mechanisms
increase the number of transactions per second supported,
without compromising the network's security, the DeFi have a
somewhat complex future.

DeFi Protocols and how they work

DeFi has been established as a complete ecosystem of working
applications and protocols that deliver value to millions of users.
Assets worth over $40 billion are currently locked in DeFi
ecosystems, making it one of the fastest-growing segments within
the public blockchain area.
The most known DeFi use cases and protocols available in today
market are:
- DeFi lending and borrowing.
It conferred finance a new direction by enabling decentralized
lending and borrowing, considered 'Open Finance,' to offer
cryptocurrency holders borrowing opportunities for annual returns.
Decentralized lending allows people to borrow money at a specific
28

interest rate, meeting the needs of the cryptocurrency holding

community.
- The best lending and borrowing platform DeFi: Compound
Funding.
Compound Finance is the idea of Rober Leshner. This project is a
lending protocol developed on the Ethereum blockchain that
permits users to earn interest by lending assets and borrowing
against collateral. Compound protocol achieves this by creating
liquidity for cryptos through interest rates set using computer
algorithms. Its users earn interest by depositing cryptocurrencies.
Once cryptos are provided on the Compound platform, they can
use them as collateral for loans.

Decentralized exchanges
Decentralized exchanges (DEx) are one of DeFi's core features,
with the maximum amount of capital locked in compared to other
DeFi protocols. DEx allows users to exchange tokens with other
assets without a centralized custodian or intermediary. Traditional
exchanges (centralized exchanges) offer matching options, but
the investments offered are subject to the willingness and costs of
that exchange. The additional charge on each transaction is
another negative aspect of CEx, which DEx addresses.
Top decentralized exchange: Uniswap

Founded in 2018 by Hayden Adams. This is the largest

automated token exchange by transaction volume implemented
on the Ethereum (ETH) blockchain. The project was launched
after receiving subsidies from multiple equity firms, including the
Ethereum Foundation. These automated swap transactions
between cryptocurrencies through smart contracts.
UniSwap today offers three functionalities: removing liquidity,
exchanging tokens, and adding liquidity.
29

- Token exchange:
Users must create a Metamask account to utilize this service.
Once a Metamask account is created, they can select the tokens
they own to exchange for another type of cryptocurrency.
- Adding liquidity:
The users are able to deposit an equivalent value of tokens into
the exchange contract associated with the token to provide
liquidity. Once you have liquidity tokens, you are able to add them
to a "group" in the UniSwap interface. Users who provide liquidity
in UniSwap earn exchange fees, calculated by the value of tokens
offered for liquidity.
- Removing liquidity:
You can remove it by simply choosing the 'Remove Liquidity'
option from a drop-down menu.
Stablecoins

They are a highly viable solution to the volatility issues related to

cryptocurrencies and are helping DeFi gain prominence. The
value of stablecoins depends on the more stable asset that seeks
to keep its prices constant, such as gold, silver, or the US dollar.
Stablecoins became useful during risky times in the crypto space,
providing a safe haven for investors and traders. Stability makes
them a reliable collateral asset. Stablecoins also play an essential
role in liquidity pools, an integral part of the DeFi and DExs
ecosystem.
MakerDAO

It was founded in 2015 by Rune Christensen; MakerDao is an

organization-building technology for savings, borrowing, lending,
and a stable coin in the Ethereum blockchain. This project was
one of the first DeFi protocols ever. Instead of conducting an ICO,
30

the project privately sold MKR tokens to fund development over

time.
The protocol allows users to send or deposit some $ ETH to a
smart contract on the Maker protocol and create a Collateralized
Debt Position (CDP). This will enable the ability to take $ DAI at a
specific collateral rate.
If the price of $ ETH drops in the future, a user's PDC will be
automatically closed to guarantee that the network has enough
capital locked up against borrowed tokens. This can be avoided
by putting in more $ ETH or taking out less IAD in the first place.
It is possible to reclaim $ ETH by returning the principal amount
with a small fee.
Prediction markets

Prediction markets are platforms where people can predict future

events, ranging from sports or political betting to stock price
predictions and more. Decentralized finances open these markets
for participation. This concept of decentralized prediction markets
has long been promoted as a possibility through smart contracts.
Top prediction marketplace: Augur

It's a highly decentralized prediction market platform that applies

the collective prediction of the masses. This DeFi platform uses
Ethereum to harness the "wisdom of the crowd" to create real-
time predictive data. The initial version of Augur was launched in
2015, and its mainnet was launched in 2018.
Augur offers you two main actions:
- Market creation:
The users can create an Augur market by spending a certain
amount of Ethereum. When creating a marketplace, users must
31

set buyer fees and maker fees, which ideally should be low
enough to invite people to bid and high enough to pay the cost of
Ethereum.
- Trading event shares:
Users can buy and trade shares that represent the odds of a
market event occurring. Traders can make some money by
buying positions at low cost and selling them when the price rises.
The people who predict an event correctly will also receive
rewards when the market closes.
Asset Management

Another service DeFi offers is asset management. It is intended to

make investing faster, less expensive, and more democratized.
These aspects of the DeFi ecosystem play very favorably for
asset management, including transparency, composability, and
untrustworthiness.
Decentralized transparency will make information accessible and
secure, composable to enjoy hyper-customization of portfolios,
and achieve accessing historically illiquid assets and manage
your investment regardless of where you are located.
Ampleforth

Launched in 2020 by Evan Kuo, Ampleforth's goal is to offer a

digital asset that helps traders and investors diversify their crypto
portfolios. It is a DeFi asset management protocol designed to be
synthetic and smart base money. Synthetic since they are created
by humans but are not commodities like gold or silver.
Ampleforth adjusted the supply of its tokens daily to reach market
demand using a smart contract. These contracts use Ampleforth's
price oracle and Chainlink to pull real-time data from Bitfinex
Exchange and KuCoin Exchange. These decentralized price
32

feeds help determine if the token price is within the equilibrium

range (0.96-1.06 USD). If the price of an AMPL $ token is less
than $0.96, the bid decreases. If it is more significant than $1.06,
Ampleforth increases the price of the bid.
AMPL is an ERC-20 token that aims at the target price of $1. But
instead of linking it to a fiat currency, Ampleforth allows the tokens
to fluctuate in addition to the price as it aims to achieve an
equilibrium range. Actually, the price is automatically adjusted in
Ampleforth wallets. Since the supply of AMPL $ tokens is not
affected during inflation or deflation, Ample is an optimal asset to
keep its purchasing power versus other assets.

The future of DeFi

For the first time in history, that same population is shaping a
global financial system for a worldwide population. Everyone can
participate in the governance of DeFi protocols and get a seat at
the table where the world of decentralized finance is actively
being created.
The DeFi space is gradually catching up to the traditional financial
system. Despite some of the certain hurdles while operating at the
forefront of innovation, the world of decentralized finance is on the
road to thriving. It is challenging to predict how this space will
shape up when the power to build financial services is
democratized. However, when DeFi and fintech map and merge,
we will have an inflection point where nascent financial
technology is just part of a new financial system. One that realizes
the dream of being efficient, secure, available, and equal.
DeFi will succeed if the protocols are technologically integral, if
they ensure proper functioning through algorithm/protocol
performance and transparency and facilitate auditing, and if they
have a record of all operating nodes at all times.
33

How millions of dollars go up in smoke

The justification that they act this way for the sake of better code
quality is not true. In Bitcoin, Ethereum, and even the Linux
kernel, anyone can submit code for review and be included if it
fixes a problem. The Linux kernel keeps more than 90 percent of
the world's servers running, so it is a critical performance piece,
far more than a DeFi protocol can dream of today.
This brings us to another paradigmatic case: that of SushiSwap.
Recently, this project gave rise to a whole novel, the crypto world.
Its creator, Chef Nomi, wanted to make an "exit" and leave the
project in the hands of a third party. The reason? "For having
done an excellent job creating the SushiSwap protocol."
His argument doesn't hold water, as SushiSwap was a "copy and
paste" of Uniswap, with a few improvements (a governance
token) and little else. Nevertheless, the story had a happy ending.
Chef Nomi returned the money and apologized. However, the
story leaves a bitter taste for DeFi: decentralization contains more
pitfalls than the fine print in a contract.
A DeFi platform will be as decentralized as its programming,
organization, governance, and access to code allows. If these
factors are not met, there can be no decentralization, and many
DeFi protocols fail in this respect. Therefore, perhaps the time has
come to create a DeFi license, similar to the GPL or BSD in the
open-source world.

Difference between DeFi and cryptocurrencies

Many DeFi users wonder if decentralized finance is as secure as
cryptocurrencies. The answer is: No. They are not as safe as
cryptocurrencies.
34

First of all, a DeFi platform relies on programming that is linked to

a smart contract. This programming can be more or less complex,
depending on the platform's functions and the programmer's
skills. This is the first flaw: complexity. A complex smart contract
is a lot difficult to audit. This situation leads to the fact that it can
fail under certain circumstances even if no problems are visible. If
someone detects the flaw, it can be exploited. Something that is
often happening. For example, bZx was hacked recently, and they
lost over $8 million from their liquidity providers. Another attack by
a Soft Yearn user managed to turn $200 into $250,000 from a
smart contract bug.

The power of smart contracts

DeFi is built to trust our money in a smart contract. That is, you
invest money in it, and it locks the balance. The smart contract
controls the money, and a hack means the possibility of losing the
money. In the case of bZx, the damage was significant.
Many people lost all their money, and the platform, considered
one of the great DeFi's less than a year ago, is now almost dead.
The bZx software has been audited three times but is still flawed.
This means that even audited software is not secure.
In contrast, with straight cryptocurrencies, as can Bitcoin or
Ethereum, it is challenging to have situations like the one
described above. If cryptocurrencies are stored in a safe place (a
paper wallet, a hardware wallet, or on a computer without Internet
at home), no one will be able to get the money out of there.

The shadow of scams

Many newcomers to the crypto world are surprised to see the
enormous profits that DeFi can offer. Many wonder if the whole
thing could be a scam. The question is not irrelevant in the face of
35

gains of more than 15 percent just for saving. Figures that no

traditional bank is in a position to offer.
To the question of whether Defi is a scam. It all depends on the
project, background, technical history, community, and trust it
generates. All this can only be known by investigating the project.
But researching doesn't mean seeing the most unknown
YouTuber in the world and listening to him say a thousand
wonders about the project. It is common to see how specific
unknown figures tell us how they have become rich in 5 minutes
or how anyone can do it by investing only 50 euros, which he
claims to have invested in the platform. An investigation of a
project requires carefully reading its technical documentation. But
also reviewing its community in the networks, exchanging
impressions with other people, and asking recognized
personalities of the ecosystem. A tedious process, but one that
will save you a lot of trouble and headaches in the future.

Millionaire meme projects

Let's take an example, who researched HOTDOG or KIMCHI
before investing in them? Both projects are "meme tokens."
Tokens were created as a joke, which raised almost 90 million,
only to fall to nothing and cause money losses for all their
investors. These projects reached those levels offering up to 4
million percent profit. Lots of people are driven by the fear of not
being the first or FOMO (fear of missing out).
If a project offers 1 million percent interest per year, it is more
than suspicious. Levels of more than 500 % are already crazy
because although there are projects that have passed that level of
earnings in a short time, behind it, there is a significant risk of
losing everything.
36

Therefore, before investing in DeFi, you should be clear about two

things: no project will make you rich in a week, and the high-
interest rates are a bait.

DeFi boom - good or bad?

For those wondering if the DeFi orgy may end up like the ICO
boom, DeFi seems more restrained. At least in terms of options
and projects. The ICO boom, sustained with tons of marketing,
led people to think that everything that was unfixable in the world
could be fixed with blockchain. The magic words were blockchain,
token, and revolution. The result was impossible projects,
pharaonic ideas that made no sense at all and were stillborn.
Some were never even born. They were scams.
With DeFi, everything is more restrained. New projects appear
every day. However, very few achieve high levels of investment.
The best thing about DeFi is that it proves that blockchain can
make the financial world a different space. A space without
borders, fairer and more open for everyone. It doesn't matter
where you live. You can live in the United States, China, Spain, or
Venezuela, and if you want to invest in DeFi, you can do it. You
only need a few cryptocurrencies. You can choose between a
KYC (anti-money laundering) or a private and anonymous
platform.
Satoshi Nakamoto probably envisioned DeFi when he created
Bitcoin. A new scenario where money belongs to you and you
have the freedom to do with it what you want. DeFi goes far
beyond this. Bitcoin is the first DeFi in history, although its
functions are limited concerning the platforms discussed in this
book. Despite this, Bitcoin's revolution started 13 years ago,
showing us that the world is now different and it will never be the
same again.

What are the main advantages of DeFi?

37

DeFi has many advantages that it offers to both users and

investors. But if we were to go into each of them, reading the
article would be painfully long. So, let's discuss the essential
benefits that have helped DeFi gain the popularity and support it
is proud to have as of now.
1. No permissions
To make the best use of DeFi, we must take a look at the
permissionless nature of transactions on the blockchain. It helps
financial products and services built on the blockchain reach
many people for whom access to centralized finance is not an
option. And you'd be surprised how many people that is.
Currently, about one-fifth of the world's population does not have
access to banking solutions for one reason or another. Don't have
the proper documentation? Can't access banking solutions. Don't
have a bank where you live? Can't access banking solutions.
Don't have a good credit score? Can't access banking solutions.
DeFi frees you from these problems and allows you to access the
financial vehicles that centralized finance cannot provide due to
geopolitical restrictions in your location.
MakerDAO is an excellent example of how DeFi can help you
overcome the restrictions imposed by centralized finance. With
the help of this application, you can now leverage Ethereum to
apply for a loan. And this process is pretty straightforward. All you
got to do is deposit ETH on the platform.
Then, the platform would use an automated smart contract to
manage the rest of the process. This contract would help you
create a collateralized debt position (CDP) that would allow you to
get DAI tokens.
2. Improve revenue opportunities
38

By being flexible, DeFi allows you to add more value to your

digital asset investments. The decentralized applications (dApps)
Compound and Dharma are good examples of the same. They
help you employ digital assets such as DAI and USDC by
allowing you to lend some of your assets for others to borrow.
If you lend some of your assets to other investors on the platform,
you get better interest rates than those offered by conventional
banking systems.
3. It makes banks superfluous
There is no denying the vitality of banks in the world of finance.
But they are not always accessible to many people.
Since DeFi solutions work much better in terms of accessibility,
they are the only viable solution for many people.
By replacing banks to provide financial solutions to people, DeFi
makes banks redundant.
4. Brings rapid innovation
The traditional financial industry has largely remained the same
over the years. DeFi, on the other hand, has been consistently
providing the world with innovative products and services. And
being an open protocol with robust community support, DeFi has
the power to bring innovation rapidly.
As more and more users lend their support to the system, the
ecosystem quickly changes and provides support for a whole new
generation of services in the financial world. It has brought
innovation that was primarily thought of as the domain of
centralized economic systems.
5. It is transparent
39

Transparency is one of the most prominent aspects of the DeFi

space. Giving everyone access to the source code makes it
easier for people to trust the system better. It also makes the
process of testing and testing applications created for the DeFi
ecosystem easier. And it does it all while keeping the trustless
nature of blockchain technology.
6. Puts you in control
One of the essential characteristics of the app created for the
DeFi ecosystem is that it puts customers in control of their
finances. Unlike banks where the bank or government sets the
rules and primarily takes care of your investments, DeFi gives you
the flexibility to make decisions about the investments you make
with your money.
What challenges does DeFi face?

While DeFi has many great things to offer, it has its own
drawbacks, just like any other technology. Let's take a look at
them:
1. It's slow
Blockchain technology is one of the safest technologies due to its
complex, encrypted, and distributed nature. Unfortunately, this
security comes at a cost: speed. Transactions conducted on the
blockchain are much slower than their traditional counterparts.
And while that's acceptable to many of us, it could be something
that would make many people want to shy away from using the
technology. That said, DeFi app developers keep limitations in
mind when working on new projects. Most, if not all, of the
products and services in the DeFi ecosystem are optimized to
provide users with the best possible experience.
2. Errors are pretty common and are caused by the user
40

In centralized systems, the responsibility for error-free execution

of tasks falls on the organization's single source. However, when
it comes to decentralized systems, ensuring that no errors are
transferred to the user. They can (and often do) make mistakes.
The nature of blockchains makes it somewhat tricky to minimize
the risk of such errors. And that makes designing the correct
product with minimal risks a daunting task for developers.
3. You're on your own
The kind of experience you have using a DeFi application is
mainly up to you.
Centralized systems commonly have huge customer support
teams that guide you through the applications. They make sure
you have a good experience while using the apps by responding
to your queries promptly.
Decentralized systems struggle to have such teams. There is a lot
of documentation available. And you have a reliable community at
your disposal now. If you have an issue, you have to go the extra
mile to solve it. No one does that for you.
4. Too many options
The DeFi ecosystem creates out new and innovative products
regularly. And while that's great, when you have a specific use
case, you have to sift through many options to make the right one.
And that's a pretty overwhelming task for an average user who is
still new to the ecosystem.
This pushes developers to create apps that solve specific
problems and think about how those apps would fit into the DeFi
ecosystem.

How to get started with DeFi?

41

Getting started with DeFi is easier than you think. To get started,
you need a wallet. This may need a bit of research and thought
because you need a wallet that works on the blockchain of your
choice.
Currently, two of the most prominent blockchains in the DeFi
space are Ethereum (ETH) and Binance Smart Chain (BSC).
While Ethereum has been the center of innovation in this space
for a long time, things are changing.
As more and more projects find themselves on the Ethereum
blockchain, the network is slowing down. If slow transaction
speed is something that you can handle, it's safe to opt for
Ethereum.
However, if transaction speed matters to you, opt for BSC. Being
relatively new, BSC boasts better transaction speeds and low
fees. Both of these things are inviting merchants and developers
in the industry to move their projects to BSC.
If you have chosen Ethereum as your blockchain of choice,
MetaMask is definitely an excellent wallet to have. It is one of the
most popular election for users such as traders and investors
across the industry.
If you have chosen BSC as your blockchain of choice, I would still
recommend using MetaMask as your crypto wallet. While the
crypto wallet started out as an Ethereum-based wallet, it is
compatible with BSC. Since people are familiar with MetaMask's
interface, it's an excellent choice for most merchants.
That said, the industry has many options to offer. Depending on
what best fills your needs, you can opt for almost any crypto
wallet.
Once you've selected your wallet, it's time to shop for the cryptos
you want to invest in.
42

Don't forget that an Ethereum-based wallet is likely to store all

your ERC-20 tokens and other Ethereum-based tokens. However,
if your tokens are part of the BSC ecosystem, you need to use a
BSC-based wallet.
Now that you've purchased the relevant tokens, you're ready to
enjoy DeFi, and there are many ways to do so.
For starters, you can lend out your tokens and potentially profit
from that. Now, you can lend your tokens to other traders and
profit from the interest they pay.
Alternatively, you can lend your tokens to platforms and earn a
return for doing so. This is called yield farming and is all the rage
in the crypto industry as of now. One of the most used platforms
for engaging in yield farming is yearn.finance.

Why is DeFi making massive progress?

Since its introduction into financial transactions, this product has
recorded upward mobility with massive progress. You would
wonder why DeFi is making such enormous progress in the
financial niche. Here are the main reasons why DeFi is the
preferred choice for most people.
Regulators are buying it
Regulators have been agents of change in the financial world.
Most of the progress or delay recorded by some financial trends
and applications introduced in the financial institution is due to
regulators.
Regulators wield power to allow a new system to thrive or put out
its fires before it even begins to spread. Therefore, they have to
take some crucial decisions that will affect the state of society and
everyone involved.
43

Whether or not they buy a financial product will determine

whether or not they will prosper. The situation is delicate. If they
permit these novel approaches to handle financial affairs to
flourish, they may be putting financial institutions such as
corporations and banks at risk of not making a living as
intermediaries.
Moreover, they must make decisions to protect society from the
financial risks involved in conducting financial transactions and
saving money in unregulated spaces. However, a large number of
people are already buying this innovative asset. Moreover, with
the trend of technological innovations affecting all aspects of
human life, there will only be more innovation, not less.
Clinging to archaic approaches to handling financial matters has
been the bane of new approaches. It has created a genuinely
hostile environment that has produced some innovations in the
bud. But it seems that the era of stifled creativity is passing.
These regulators embrace these modifications because they are
taking some decisions supporting the DeFi system from the look
of things. The United States Securities and Exchange
Commission (SEC) admitted Arca in July 2020. Arca is an
Ehereum-based fund. Their approval is a positive sign of DeFi's
acceptance.
This was a response to the 2018 incident when New Jersey-
based Basis returned $133 million because SEC regulations
stifled its operating ethos. However, there is hope for a better
environment for technology innovations in the financial space with
the current trend.

Financial institutions are buying it

DeFi has also piqued the interest of major players. Some major
players and institutions are starting to embrace DeFi and
44

incorporate it into their system. For example, 75 of the world's

licensed banks incorporate blockchain technology into their
operations to make payments faster and more efficient. This
financial instrument is part of the Interbank Information Network
led by The Royal Bank of Canada, ANZ, JP Morgan.
People want to leverage value
One of the reasons DeFi registers so many savers is that people
have seen that saving with DeFi has value. DeFi has higher
returns. Many tokens were worth very little when they entered the
financial space. However, with people putting interest in DeFi, the
resulting effect is evident in the rapid growth of the tradable asset.
Covid-19 restrictions have favored the system
The Covid-19 pandemic has created an environment for DeFi to
thrive. With Covid, some territories are subject to restrictions. In
addition, the interest rate in global environments is lower than
usual.
However, with DeFi, investors have a higher interest rate.
Compound offers an interest rate of 6.75% per annum for people
using the decentralized stable coin Tether. In addition to this
impressive interest, savers also get Comp tokens. People who do
not have bank accounts can make use of DeFi.

Advantages of Decentralized Finance

This decentralized system has given crypto assets an edge over
fiat currency and other valuables. Here are some of the
advantages of this technological innovation in the world of
cryptocurrencies:
DeFi has affected the market trend in favor of all tradable tokens.
45

With the arrival of DeFi in the market, people have found a better,
easier, and more efficient way to conduct financial transactions
and, of course, have given it some serious thought. The result of
that thinking is the rise of DeFi's reputation.
For example, in the traditional financial system, lenders and
borrowers are legally required to know each other before any
transaction takes place. That is, both parties must disclose their
identities. In addition, the lender will have to evaluate the
borrower and determine their ability to repay the loan before the
transaction takes place.
With DeFi, there is no need for such scrutiny and consideration.
The system allows for trust and privacy. The smart contract has
an enforceable agreement, and the process is automated. It uses
online blockchain technology. With an option like this, most
people are making a 180-degree turn away from the usual
traditional financial system and are locating their way to DeFi.
DeFi has caused an increase in the value of digital assets
The market capitalization of tradable tokens has increased
tremendously as a result of this system. The token that traders
use for DeFi smart contracts has a higher value today. In the
space of a year, some tokens have tripled in value and even more
than that.
The Aave token, for example, has increased nearly 200 times in
value. Another token, the Synthetix Network Token, has
increased 20 times more than its value. The erc20 tokens are also
performing well. All this is made possible by the DeFi system.
DeFi gives people access where the traditional system restricted
them.
46

With the strict requirements of the traditional system, most people

cannot access financial services within that space. There are
several restrictions on loan issuing platforms.
However, with a DeFi tool, anyone can access financial services.
Factors such as age, wealth, or geographic location are not a
barrier for anyone. With a cell phone and an Internet connection,
anyone can access the Internet and access financial services.

DeFi offers more transparency

DeFi offers a more transparent financial platform than the
traditional system can offer. Most DeFi protocols are created on
the blockchain and are accessible to everyone involved.
Transactions recorded in the system are open to public scrutiny.
You can also use governance tokens to shape the future of the
protocol. Accounts have numeric addresses, which only makes
them privacy-sensitive.
With transactions open to all, there is no room for suspicion. It is a
platform where trust and privacy thrive. This type of operation
promotes accountability. When transactions are accounted for,
there is a greater likelihood of improved operations.

Drawbacks and Risks of DeFi

With the juicy tales of Defi services also come to some risks that
cannot be neglected. Some of them are:
Third-party auditing
DeFi is based on a smart contract. In some ways, Defi protocols
can be susceptible to tampering. A DeFi protocol that contracts its
smart contract auditing to enterprises may be putting the system
at the mercy of exploiters, either now or in the future.
Centralization of the data feed
47

DeFi uses blockchain protocols. However, they cannot access off-

chain data. This is where oracles come in. These third parties
bridge the gap between the blockchain and offline data.
The point of concern in this setup is the possibility of the oracle
making a mistake. If it ever happens that the oracle transmits
incorrect information, the effect will be disastrous.
Risk of hackers

There is a lot of potentials for hackers to exploit the system since

it operates a decentralized application.
While centralized exchanges can freeze the hackers' accounts,
those with a decentralized system cannot freeze their funds.

What are Decentralized Applications?

Decentralized applications are a large part of the entire DeFi
spectrum. Apps are fundamental to understanding DeFi's
capabilities and how it works. dApps are applications built on
blockchain that work to service financial transactions over a
decentralized network. Whether blockchain or another DLT-based
foundation, the idea is to create a decentralized framework.
Therefore, DeFi apps are not under any central organization or
monitoring authority.

How dApps are taking over traditional finance

The dApps are fully automated and are driven by smart contracts
that define the various financial functions. These pre-programmed
contracts work seamlessly according to the initial values and feed
protocols. Most importantly, smart contracts can handle multiple
functions, including customer approval and payment processing.
Think of them as money legacies that can be expanded according
to the developer's choice.
48

DeFi progress currently depends on Ethereum (ETH) evolution.

Actually, most value is locked in Ethereum based projects.
Therefore, the programmatic flexibility and scalability of Ethereum
will define how fast these DeFi financial products progress.

Key components of DeFi

The field of DeFi applications is growing at tremendous speed.
Applications serve countless purposes, which helps save time
and money. Today, almost every industry has a relevant DeFi
application. As the industry expands, dApps also expand their
reach to serve more customers. Here are some of the standard
features of DeFi apps:
Open-source
Most of the DeFi apps follow open-source protocols to remain
decentralized and serve a wide range of audiences. Public coding
helps to get multiple programming inputs. Auditing remains
transparent in addition to offering superior security and
functionality. Open-source codes are known for their safety and
stability.
Transparency
When related to DeFi, the concept of transparency takes on a
whole new meaning. Transparency is intrinsically rooted in the
decentralized realm, and DeFi is no different. Since most dApps
are based on the Ethereum blockchain, which inherently offers
superior transparency in transactions, payment processing,
functionality, and smart contract mechanisms. Unlike traditional
banking, all blockchain-concerning interaction remains in the
public domain.
Another vital difference is that individuals are not directly
connected to a bank's specific account per se. In fact, the system
employs a numerical address, and the underlying account
49

remains pseudo-anonymous. Information about cryptographic

assets remains secure at all times. Accounts have owners and
can be tracked if necessary.
Global reach
There is a shortage of banking channels in developing countries.
DeFi is helping empower the downtrodden with secure banking
solutions. DeFi developers are building next-generation financial
platforms that can be used in remote areas with minimal Internet
connectivity.
In addition to developing countries, Defi's services serve
developed regions where traditional banking failures have
disrupted financial channels. Old banking and monetary systems
are being upgraded with new technologies. The unbanked
masses and traditional clientele are jumping on the DeFi
bandwagon. Whether in a village in Hawaii or New York City,
numerous types of DeFi services are available.
No permission
There are no gatekeepers at DeFi, and the power is available to
anyone. You can access or develop a DeFi application with
minimal limitations and permissions. Unlike licensed players, DeFi
is open source and, therefore, much more accessible.
The conventional bank account doesn't give much freedom, and
approvals are a significant concern. Problems related to interest
rates are kept to a minimum. The decentralized world avoids
unnecessary regulatory mechanisms and therefore offers the best
available finance products.
Interoperability
It is at the heart of the DeFi revolution, as it links new-age and
legacy banking channels. It ensures that seamless functionality is
50

maintained across diverse blockchain platforms. DeFi solutions or

money laymen must operate across countless networks and
platforms to serve their varied customers.
Decentralized solutions are designed to keep accessible to
developers, users, critics, and everyone. In addition, users must
implement stable currencies, trade on an exchange, use wallets
and do so simultaneously. Therefore, interoperability is crucial for
Defi applications, as these legacy currencies require
implementation in diverse blockchain environments.
Flexible
Flexibility is a crucial feature of DeFi applications. A flexible
environment, especially the Ethereum blockchain, allows
developers to sync with changing financial scenarios. Platforms
must remain flexible to offer new features and integrate with other
platforms/networks. Users must have independence in their
interface design and interaction protocols for smart investing.

DeFi Redefines Lending Solutions

Lending is an area where DeFi excels. Over the past two years,
DeFi's lending solutions have taken off. The traditional loan
approval process is cumbersome, slow, and confusing. The big
banking giants rule the lending arena and have a monopoly in
their respective regions. Negotiating with credit companies to get
a suitable loan is a little short of bullying.
DeFi has redefined lending by designing super innovative
consumer-centric products. This new-age DeFi-powered financial
system offers flexibility, better rates, faster processing, more
lender options, and more. Ethereum is also gaining traction in the
lending space. There has been a change in the lending industry
since the introduction of decentralized applications.
51

Compound: redefining lending

Compound dApp is where DeFi shines the brightest. It has proved
to the world how lending can be an exciting concept by
empowering both the consumer and the lender. Compound offers
users the ability to lend their cryptocurrency to other users without
an intermediary. In return, lenders earn interest, which is also in
the form of cryptoassets. From an investment perspective,
borrowers and lenders are matched according to smart contracts,
making it a much safer process than the current lending scene.
In addition, smart contracts also manage interest rate payments
according to changing market conditions. There are no
intermediaries or third parties involved in this process. Compound
has been such a hit that many similar dApps have been built with
the same interest rate pattern.

Decentralized Exchanges: Bringing Tomorrow’s

Traders Together
A decentralized exchange represents this coming of age of the
cryptocurrency realm. This DeFi use case offers more safety and
features to crypto users with minimal human intervention. Peer-to-
peer lending is ideal for catering to the unbanked and those
looking for more flexibility. The streamlined user interface and
enhanced security system are suitable in today's cyber scenario.
Different from the traditional centralized money market or
Coinbase, decentralized exchanges are more transparent,
secure, and efficient. Conventional products are vulnerable to
theft, security breaches, and hacking scandals. A fast Google
search reveals a history of exchange crashes that caused
considerable losses to users.
Decentralized exchanges suffer no such problems. Smart
contracts ensure that money or digital assets are not held directly,
52

and blockchain hides user data. Also, wallet-to-wallet interaction

promises much more security for your digital assets. Currently,
there is no centralized point to attack in a decentralized
exchange.

Uniswap: next step in the lending ecosystem

The Uniswap platform has changed the way users trade. The
innovative smart contract mechanism enables instant agreement
between parties. Live rates offered to traders help execute trades
with confidence, unlike other traditional types of trading. The
'Pooling' feature further allows users to earn interest through
borrowing without third-party involvement.

Next-generation savings powered by DeFi

Savings are the lifeblood of the financial industry. Whether it's
short-term savings accounts or pension funds, savings are crucial
to the life of a working professional. DeFi products are helping to
redefine the way people save in today's era. Collective interest-
bearing apps are helping users save money and earn more
interest in their collective kitty.

MakerDAO: the king of decentralization.

Maker stablecoin allows linking other stable currencies to the US
dollar by backing it with cryptographic collateral. In other words,
users can now implement cryptocurrencies without worrying about
the volatility that affects cryptocurrencies such as Bitcoin and
ETH.
Users can build their own DAI stable coin using Maker Oasis
dApp. Moreover, the stable DAI coin can be used for various
purposes, including trading, transactions, and more. In a way,
Maker can be called a decentralized reserve bank that offers dai
as a panacea.
53

What the Future Holds for DeFi

Today, DeFi products rely on a collateral model to safeguard
investor interest. As DeFi progress, borrowers will build their
credit history, allowing them to borrow without collateral. This
identity-based mechanism would require a universal decentralized
identity mechanism built on strong financial and economic
credentials.
Vulnerabilities in the smart contract must be addressed to further
protect dApps from hacking attacks. Over-collateralization must
be avoided to develop credit credentials on par with current credit
institutions.

Evolving DeFi to drive next-generation finance

Improvements in user experience will help attract more users to
your group. For example, the first-generation DeFi ecosystem
lacked an interactive user interface and website navigation
experience. The latest dApps focus on user interaction to attract a
broader audience. Like crypto assets, ease of use remains a
critical design criterion.
Crypto wallets will also undergo an evolution to offer more
features and functionalities to consumers. Shortly, all-inclusive
crypto wallets will be the flavor as consumers seek a one-stop
solution for all their crypto investment interactions. A crypto wallet
should serve as a universal gateway for end-to-end digital asset
management. Imagine a home page that displays all of your
holdings with a single click, including loans, collateral, holdings,
trading activity, and more.

Merging traditional finance with the DeFi concept

Decentralized governance is another interesting area emerging
from the DeFi ecosystem. Initially, many DeFi solutions have
54

centralized features, including 'master keys' to control certain

functions. For example, an emergency shut-off valve in the hands
of the developer team can help protect the dApp in the event of
an attack.
However, the evolution of DeFi requires that governance
protocols be shared with stakeholders. Decentralized autonomous
organizations are rapidly emerging as decision-makers that help
stakeholders exercise more control rather than banks. Today's
financial institutions have much to learn from the multidimensional
approach of the decentralized economy.

Is DeFi here to stay?

Monetary problems have always been a central subject to human
civilization. Money, in any of its forms, has been driving human
endeavors for millennia. For decades, the US dollar-dominated
the scene. Today, cryptocurrencies are doing the same, albeit on
the cyber front. We could see a whole overhaul of the financial
realm and the abolition of fiat currency in the future.

DeFi's future trajectory

Cryptocurrency and blockchain are emerging as next-generation
technologies with the potential to generate enormous social
change. As societies evolve, new technologies empower human
needs. Currently, decentralized technologies powered by
Ethereum are doing just that. Various types of Dapps provide
financial services through smart contracts and a technological
twist to disrupt the traditional system.
DeFi solutions are setting benchmarks in the financial sector. Old
forms of fiat currency are being challenged. Fast-moving
economies are embracing the latest decentralization technologies
to serve their citizens with the best banking solutions available.
DeFi solutions represent the pinnacle of democratic ideals by
55

offering a highly transparent financial system that is truly

decentralized. In a sense, DeFi means more power to the people.

What are the possible use cases for DeFi?

Where traditional, centralized finance failed, DeFi won. And it
continues to win. There are many use cases for DeFi in the world
of finance. That's why here we're going to discuss some of the
common DeFi use cases.
Lending and borrowing

One of the most known types of services you can find in the DeFi
ecosystem is open lending protocols. When you decentralize the
borrowing and lending process, you access the system's many
advantages over traditional financial institutions.
For starters, you gain the ability to secure something that the
traditional finance world finds challenging to deal with: digital
assets. Next, it eliminates the need for credit checks, which opens
up avenues for many more people to get involved. In addition, the
settlement of transactions is instantaneous when it comes to the
DeFi space. And last, but most importantly, DeFi promises
standardization (not now, but in the future).
Built on public blockchains, these lending services don't need you
to trust them. It generally has methods for cryptographic
verification of transactions.
This reduces counterparty risk and makes lending and borrowing
much more accessible, faster, and cheaper. All because these
lending markets are on the blockchain.
Money banking services

The money banking services that are part of DeFi are really a no-
brainer. After all, it's in the definition.
56

Whether it's mortgages or insurance, DeFi has solutions for

everything, and the blockchain industry is growing and maturing.
An increasing number of developers are focusing on creating
stable currencies. If you're wondering what a stable coin is, it's a
type of crypto asset linked to a real-world asset. Stablecoins are
so lucrative that they can be transferred digitally without any
problems despite being tied to a real-world asset.
Cryptocurrencies are known to be volatile. Their prices fluctuate
all the time, sometimes oscillating by significant amounts.
Stablecoins, on the other hand, have relatively stable prices and
can be a viable option for everyday use.
Starting with the mortgage, it's no secret that the whole process of
getting one is costly and time-consuming. With the help of smart
contracts, we are able to diminish legal fees to some extent.
On the other hand, blockchain dilutes risk by spreading it among
participants and removing intermediaries' requirements. This
means for you, as a customer, lower premiums without
compromising the quality of service.

Decentralized markets
Decentralized exchanges (DEX) are arguably the most important
of all DeFi applications. Therefore, it is not surprising that this
category of applications has the most room for innovation.
DEXs allow users to go ahead and exchange their digital assets
without having to rely on a trusted intermediary to look after their
funds. On these platforms, traders trade directly with each other,
and assets are transferred directly to their wallets via smart
contracts.
They do not require much maintenance, which allows them to
have lower trading fees than centralized exchanges.
57

FAQ
What are Stablecoins?

One of the significant problems in the blockchain world is price

volatility. The large intraday swings in fiat cryptocurrency trading
pairs make it very difficult for cryptocurrencies to be used in
financial products. The USD / ETH pair, for example, often
experiences intraday swings of 10% or more.
Using such an instrument for something like loans is less than
ideal. You don't want to take a 1000 USD loan only to find out its
worth 1100 USD just before it's time to pay it back. Future
planning becomes really difficult when faced with such volatility.
Stable currencies solve this problem by being pegged to a stable
asset. There are three general ways of doing this, which gives us
three general categories:
1. Centralized, stable currencies with fiat collateral:
These stable currencies are backed at a 1: 1 ratio by fiat money.
A good example of such a stable coin is the USD coin (USDC)
issued by Coinbase. It is backed 1: 1 by the US dollar. As long as
you trust in the authority issuing the stable coin and the fiat
currency to which it is pegged, you are good to go.
2. Decentralized stable coins with cryptographic collateral:
These stable coins have no user agreement or central operator.
Anyone is able to use them without the permission of the
government or any company. However, this increases the
complexity of maintaining stability.
3. Decentralized algorithmic stable coins:
These stable currencies rely on algorithms to maintain price
stability and have no collateral backing the system. One problem
58

with this type of stablecoin is that an entity with many funds can
attack them. And when that happens, people will lose their
confidence in the system's stability, causing the stable coin to die
out eventually.
However, you will often find yourself using the first two types of
stable currencies.
What is composability?

DeFi apps are also referred to as money legos. Each app pertains
to a specific financial service or product that can be mixed with
others to create a complex offering that is potent and customized
for the users' particular needs.
Most of the time, these applications are connected to each other
for individual transactions. This means that connections are made
on the fly.
This is what composability is all about. Its purpose is to helps
apps interact with each other in a relevant way rather than
working in silos.
Imagine wanting to add a feature to exchange tokenized assets in
a platform you are building. You can easily do this by integrating
one of the decentralized exchange protocols.

New DeFi applications for making money

Yield farming

For more experienced traders who are willing to take risks, there
is yield farming, where users explore various DeFi tokens for
opportunities to earn higher returns.
Liquidity mining
59

When DeFi apps attract users to their platform by giving them free
tokens. This has been the most popular form of yield farming.
Composability

DeFi apps are open-source, meaning that the code behind them
is public for anyone to see. These apps can be used to
"compose" some other new applications with the code as building
blocks.
Money Legos

To explain the concept of "composability" differently, DeFi apps

are like Legos, the toy blocks that kids snap together to build
buildings, vehicles, etc. DeFi apps can be put together similarly as
"money Legos" to create new financial products.
DeFi money lending

Lending marketplaces are a popular form of DeFi, connecting

people who need money or credit (borrowers) with cryptocurrency
lenders.
Platforms such as Compound, which allow users to borrow
cryptocurrencies or offer their own loans, are increasing. Users
can earn money from the interest for lending their money.
Compound sets interest rates algorithmically, so interest rates will
be higher if there is a higher demand for cryptocurrency loans.
DeFi loans are collateral-based, meaning that to borrow money,
the user has to put up collateral (often ether, the token that
powers Ethereum). This means that users do not give their
identity or associated credit score to borrow, which is how
standard loans work, not DeFi.
Stablecoins
60

Another form of DeFi is stablecoin. Cryptocurrencies often

experience many price fluctuations than fiat money, which is not
suitable for those who want to know how much their $ will be
worth two weeks from now. Stablecoins peg cryptocurrencies to
other currencies, such as the US dollar (this is the case with
USDT Tether, somewhat challenged in recent months), to keep
the price in check. As their name suggests, stablecoins aim to
bring "stability" to prices.
Prediction markets

One of the former DeFi applications living on Ethereum is the so-

called "prediction market," in which users bet on the outcome of
some upcoming event, such as "Will Joe Biden win the 2020
presidential election?"
The goal of participants is obviously to make money, although
prediction markets can sometimes predict outcomes better than
conventional methods such as polls. Centralized prediction
markets with a solid track record in this regard include Intrade and
PredictIt. DeFi can drive interest in prediction markets, as
governments traditionally frowned upon and often shut down
centrally managed.

How can I make money with DeFi?

The value and amount of money invested in Ethereum DeFi
projects have skyrocketed in 2021 thanks to the popularity of
platforms like PanCake Swap or UniSwap, and the proliferation of
shitcoins-type tokens, with many users reportedly making lots of
money. And also others who have lost because of scams and rug
pulls (rug-pulling, alluding to the sudden and unannounced
withdrawal of the initial capital invested by the token creator).
Thanks to token exchange and Ethereum-based lending
applications, users can generate "passive income" by lending
61

their money and earning interest on loans. Yield farming has the
potential for even higher returns but with greater risk. It allows
users to leverage the lending aspect of DeFi to put their
cryptoassets to work, generating the best possible returns. But
these type of systems tends to be complex and often lack
transparency.

Is it safe to invest in DeFi?

It is not secure to invest your money in DeFi. This should be clear.
It is risky. Many people believe that DeFi is the future of finance
and that investing in disruptive technology early could lead to
massive gains. But it's hard for newcomers to be able to separate
the good projects from the bad. And the truth is that there have
been many bad ones. In this regard, it is essential to do a good bit
of due diligence before investing money in any DeFi project,
token, cryptocurrency, or shitcoin.
As DeFi has grown in activity and popularity through 2020, many
DeFi applications, such as the memecoin YAM, have crashed and
burned, sending the market cap from $60 million to $0 in 35
minutes. Other DeFi projects, such as Hotdog and Pizza, had the
same fate, and many investors lost a lot of money.
Also, DeFi bugs are unfortunately still very common. Smart
contracts are robust but cannot be changed once the rules are
built into the protocol, often making bugs permanent and thus
increasing risk.

Is DeFi going mainstream, and when will DeFi go

mainstream?
While more and more people are attracted to DeFi apps, it's hard
to say where they will go. It largely depends on who finds them
helpful and why. Many believe that several DeFi projects can
become the next Robinhood (popular US app for investing in the
62

stock market with stocks and derivatives), attracting hordes of

new users by making financial apps more inclusive and open to
those who don't traditionally have access to those platforms.
DeFi is promising. But it's also a headache. This financial
technology is new, experimental, and not without its issues,
particularly regarding security or scalability.
Developers hope to iron out these problems over time. Ethereum
2.0 could address scalability issues through a concept known as
sharding, a way to break the underlying database into smaller
pieces that are more manageable for individual users. Plus, it's to
be seen what the DeFi network that will emerge from the
promising ADA Cardano smart contracts in late 2021 is capable
of.

How will Ethereum 2.0 affect DeFi?

Ethereum 2.0 will not be the ultimate solution to DeFi's problems,
but it will provide a good starting point. This is mainly because of
the massive increase in transaction capacity that it will present,
favorably impacting cost and speed. Other protocols, such as
TrueBit and Raiden, are also gearing up to solve Ethereum's
scalability issues.
If these solutions are implemented, Ethereum's DeFi experiments
will become genuine products and even mainstream.

Bitcoin as DeFi
Although Ethereum is the leader in the DeFi world, many Bitcoin
advocates aim to eliminate intermediaries from more complex
financial transactions and have developed ways to do so using
the Bitcoin protocol.
Companies such as DG Labs and Suredbits, for example, are
working on a Bitcoin DeFi technology called discrete log contracts
63

(DLC). DLC allows a way to execute more complex financial

contracts, such as derivatives, with the help of Bitcoin. One use
case for DLCs is paying Bitcoin to someone only if certain future
conditions are met. For example, if Real Madrid wins their next
match, the winner will give the money.

Main DeFi cryptocurrencies

Uniswap - UNI
Chainlink - LINK
Wrapped Bitcoin - WBTC
Dai- DAI
Aave - AAVE
Terra - LUNA
PancakeSwap - CAKE
Maker - MKR
Compound - COMP
Avalanche - AVAX
The Graph - GRT
Synthetix - SNX
yearn.finance -YFI
THORChain - RUNE
SushiSwap - SUSHI
Basic Attention Token - BAT
64

Mdex – MDX
Bancor - BNT
Curve DAO Token - CRV
BakeryToken - BAKE
UMA - MA
Fantom - FTM
Ankr - ANKR

What is yield farming?

It is the process of staking your cryptos to earn more as passive
income. You are adding liquidity to a platform and earning
rewards in the form of interest for doing so.
This process is similar to holding traditional fiat money in a
savings account. Money held in a savings account is employed in
the bank's general liquidity pool.
Banks use that pool to lend and provide money to customers.
Yield farming is the same idea. Only you are contributing to a
lending platform instead of a bank.
All loans are held in a smart contract, which needs the borrower
to put up collateral before accepting. Once they repay the loan,
you earn interest on your tokens, as well as the platform's
cryptocurrency.
Yield farming is part of what makes decentralized finance turn.
There are several platforms for this type of trading, such as
Compound and Aave. If you lend on Compound, you will earn
interest on your borrowed assets, as well as COMP tokens for
using the platform.
65

If you know what staking cryptocurrencies through the proof-of-

stake algorithm is, such as what Ethereum is updating with its 2.0
format, you already understand what yield farming is.

How to get started in yield farming?

To get started in yield farming, you need to register with a liquidity
pool such as Aave. You will also need to hold assets, usually
Ethereum or ERC-20 tokens, in your connected wallet. A popular
ERC-20 wallet to use is MetaMask in this case.
You will then select the liquidity pool of any asset you wish to lend
and enter the desired amount. The platform will indicate the fees
and projected earnings. Once you have contributed to the liquidity
pool, it's time to start earning.
Rewards will be paid according to a minimum threshold,
depending on the lending platform and the asset you choose.
Borrowers also have a say in the amount and duration of their
minimum payments. Also, keep in mind that you will need to
dedicate a significant amount of liquidity to see meaningful
returns.

Is cryptocurrency farming profitable?

Many would say that cryptocurrency farming is very worthwhile,
considering that you are earning interest on crypto that was in
your wallet in the first place.
Depending on how much you lend, the return from farming is
profitable because you are almost guaranteed profits. Farming is
not as risky as day trading, which could result in losing all your
funds.

What is cryptocurrency farming and staking?

66

Cryptocurrency farming and staking is the act of storing or locking

your assets in a wallet through a smart contract.
Those assets are then used to fulfill the contract and, once done,
can be returned to you. In general, stakers and farmers earn
interest in your cryptocurrencies, making your crypto work for you.

How do you grow a cryptocurrency?

You get crypto when you farm after a certain period. Payouts vary
depending on the platform you're using, but you're pretty much
set to earn every time you pledge your assets.

The best platforms for yield farming

There are several platforms for yield farming. Let's take a look at
a few.
1.Aave
Aave is a non-custodial liquidity platform for lending and
borrowing cryptocurrencies. It supports various stablecoins and
other assets, such as DAI, USDT, BAT, and yearn.finance.
The main page of the website provides an overview of the
supported assets. Here, you can see the size of the market, the
total amounts borrowed and the annual interest paid for
depositing assets and borrowing them. In addition, you can view
these securities in USD or their native parts, an ideal option for
investment experts.
Whenever you lend on Aave, you will earn "tokens." These are
basically Aave versions of the token you are lending and are
provided as an additional reward on top of the interest you earn.
The more you lend, the more tokens you receive.
67

These tokens are linked at a 1:1 ratio to your named asset, and
you can even redirect rewards off the platform to another ERC-20
address if you prefer.
2. Compound
Compound is very similar to Aave at first glance. This platform
allows you to lend and borrow for many of the same assets, for
example. Compound also provides a wealth of information, such
as annual bid rates, total bid in the liquidity pool, and more.
However, what makes Compound stand out is its implementation
on other cryptocurrency platforms. For example, you can earn the
platform's COMP token through assets stored in your Coinbase or
Ledger wallets. This saves you time and money, as you don't
need to pay transaction fees to move assets to the Compound
wallet.
Compound has also partnered with several cryptocurrency
custodians, ensuring that trusted parties reliably manage your
assets.
Finally, cryptocurrency taxation can be an issue, but Compound
integrates with the popular crypto tax platforms Tokentax and
Cointracker, providing easy export to these databases. If you
really get involved with yield farming in Compound, this will
undoubtedly make your tax life easier.
3. Uniswap
Uniswap was one of the first lending platforms to take off during
the great DeFi boom. The exchange supports over 200
integrations with decentralized financial platforms such as
Compound, Aave, and even the centralized Coinbase platform.
The platform is on its third release, which offers something unique
called concentrated liquidity. Essentially, regular lending places
68

you in the range of 0 to infinity. However, concentrated liquidity

allows you to provide assets within a specific price range, often
the range in which they usually fall. This makes lenders more
rewarding, as they lend at a higher concentrated value than the
traditional method.
Otherwise, you can enjoy many benefits in addition to Uniswap's
liquidity pool. The platform offers governance based on your UNI
token, swaps for all types of cryptocurrencies, and various
charting information that both lenders and borrowers can take
advantage of.
4. Balancer
Balancer is an interesting platform, as it allows anyone to
exchange Ethereum for ERC-20 tokens in a liquidity pool they
create. A pool they make contributes to the overall liquidity of the
"balancer" and rewards them with the platform's BAL token.
This method is also referred to as Automated Market Maker
(AMM). Basically, in a created pool of two assets, liquidity will
move as users borrow, lend and withdraw assets from it. This
activity, of course, constantly changes the price of the assets
within that pool. To counter this, Balancer automatically converts
assets across pools that create the best value for the user.
For example, an ETH to DAI trade could go through a USDT pool
if ETH and DAI are changing dramatically. Thanks to smart
contracts, this saves money for all parties over time, and the
process is entirely automatic. In addition, lenders can make more
money based on the pool they are in. This is because lenders in
the pool can customize rates between 0.0001% and 10% if they
see fit.
Balancer also provides support for up to eight tokens in a liquidity
pool. Since the platform is an AMM, prices are automatically
changed as needed, making that pool possible. Of course, it also
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rewards you with BAL as you contribute, as do most liquidity

platforms.
As of this writing, Balancer is in its first iteration. However, the
platform is looking to upgrade to 2.0 very soon. This change will
bring lower gas fees, allow for custom AMM logic in liquidity
pools, asset managers within the platform, and more.
5. SushiSwap
Finally, we have SushiSwap.
This liquidity platform is actually a hard fork of Uniswap, which
means it is also an AMM. The protocol supports several listed
assets on other providers, making it attractive to experienced
providers and borrowers.
By providing liquidity, lenders get SUSHI as a reward. They can
then take those rewards and place them on the SushiBar for
staking, granting them xSUSHI for even more profit. xSUSHI is an
asset that is minted when investors buy SUSHI, using transaction
fees to do so.
Now you know about yield farming and the best places to do it.
Hopefully, this guide can help you maneuver in a confusing,
intimidating, but profitable space.
Yield Farming, or how it translates into English "Yield Farming," is
a process that allows cryptocurrency holders to lock their holdings
for rewards. More specifically, it is a process that will enable us to
earn a fixed or variable interest by investing crypto in a DeFi
market in which we are providing liquidity.
In a nutshell, yield farming consists of lending cryptocurrencies
through smart contracts on a network in exchange for interest.
I always like to make the analogy with the standard fixed term
where we put our money at the bank's disposal, which locks it for
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the established time, and at the end of the period returns us the
capital plus interest. The bank itself uses that money, that
liquidity, for its own operations.
This is very similar, but with cryptocurrencies and with much,
much higher yields.
Yield farming is typically done using ERC-20 tokens in Ethereum
or BEP-20 in BSC, with the rewards being a form of token.
I want to clarify some of the most commonly used terms in this
trading because you will hear them everywhere.
- Farm, a set of alternatives for farming.
- Farming is the activity of lending or blocking our funds, providing
liquidity.
- Farmer is the investor or trader.
- Farming is farming.
- Yield is the profit we get from farming.
- APY is Annual Percentage Yield, which means annual
percentage yield, taking into account the reinvestment of the
funds, that is, by compound interest.
- APR is Annual Percentage Rate which means annual
percentage rate without taking into account compound interest.

Advantages and Disadvantages of Farming

Let us now see the advantages of this operation and the
disadvantages of the system itself in a summarized way.
Advantages:
- Any person can enter, without any kind of significant restriction.
71

- You can choose among many alternatives.

- Interest rates are much higher than those of any traditional
financial institution.
- At the system level, it provides liquidity to cryptocurrencies.
- It does not require much effort from the investor.
Disadvantages:
- Risks on the part of the cryptocurrencies themselves.
Remember that the funds are blocked, so we cannot operate with
these cryptos, and if they suffer any problem, we cannot do
anything.
- The platforms that offer the services are not as secure as the
investor would like, so they may suffer some problems if they are
under cyber-attacks.

Platforms for Farming

Many DEFI platforms offer these opportunities, but I will leave the
most important ones today for you to analyze and choose the one
you like the most.
Compound

I think this must be one of the most famous platforms in the crypto
world of the DEFI lending system.
Its operation is supported by an application developed on the
Ethereum blockchain. Through its protocol, users of this platform
can make deposits and request collateralized loans.
Compound's operation is based on the implementation of
Ethereum Smart Contracts. However, the company Compound
Labs, Inc manages the financial resources accumulated in this
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platform, which takes away its 100% decentralized character.

Although its own owners have already warned that they are in the
process of becoming a full-fledged DEFI.
- Synthetix

It is a platform, which provides a protocol through which Synths

assets can be traded on Ethereum. Synths are tokens that
provide access to assets such as gold, Bitcoin, US dollars.
In other words, it connects the real world to crypto. Within
Synthetix, there are many Synths, including fiat currencies,
cryptocurrencies, commodities, and inverse indices.
- Curve

Curve is a platform that has seen a lot of development thanks to

the constant pressure that Yield Farming activity puts on the
demand for stable cryptocurrencies (Stablecoins).

How Much Can You Earn From Farming?

This is going to depend on several factors, mainly:
- The crypto.
- The platform.
- The time.
- The movement.
By movement, I mean the activity of the investor. The more active
you are and the more changes you make to your portfolio, the
better the performance. Let's remember that the interest can be
variable so periodically changing platform or crypto is an
interesting option to generate more yield.
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If I had to tell you how much you would earn in very general terms
and averaging everything, I would say:
- With a Conservative profile: between 5 to 10% APY.
- With an Intermediate profile: between 10 and 20% APY.
- With an Active profile: more than 20% APY.
There are cases where you can earn up to 100%, but they are
very particular cases, and you have to be very active looking for
opportunities.
I would say that without any complications and with a couple of
cryptos, you can get, without problems, between 10% and 15%
APY. Always talking about safe returns and without complicating
our lives too much.

What is Staking?
The cryptographic world is becoming massive, and what seemed
to be a passion of a few geeks has become a worldwide
movement transforming the relationship with money.
Thanks to blockchain technology and its ability to account for the
total supply of each coin, it has been a clear differentiator for
cryptocurrencies, with Bitcoin at the forefront.
Staking is an excellent alternative to PoW (Proof of Work)
cryptocurrency mining, as it reduces energy consumption and
guarantees the sustainability of the blockchain network.
It is unnecessary to resort to significant investments in hardware
or maintenance of spaces to host the hardware with staking. Still,
it facilitates access to anyone who wants to enter the
cryptographic ecosystem and earn something by holding coins.
74

It would be like earning dividends for saving certain coins. But let
something be clear, not all wallets offer the same returns, and not
all of them offer earnings by staking.
Staking can help you to preserve your money
Unlike Pow, PoS (Proof of Stake) consists of having many
cryptocurrencies blocked to obtain rewards. The PoS, as a
protocol that supports the blockchain, makes it possible for each
coin stored in the network to act as a node that allows validating
other transactions.
To understand it better, you will need to be more familiar with how
proof-of-work mining works.
This is based on specialized machines to generate computing
power, sustain the network of miners, and thanks to that data
processing capacity, transactions are validated and sustain the
network to which it is connected, allowing to earn rewards for it.
PoW mining has proven to be a robust way to sustain
transactions and validate nodes, but it consumes too much
energy and harms the environment. This would be one of the
significant challenges PoW-based cryptocurrencies such as
Bitcoin or Ethereum have to overcome.
However, the Ethereum network is looking to migrate to the PoS
mining model to remedy that little problem that has also increased
the cost of transactions.
In that sense, according to the PoS model, it is based on what
each coin works as a node and gives you the ability to vote in the
network and get Rewards for having the coins.
To close the gap, Staking consists of generating interest from
several coins deposited in accounts with blocked funds, and that
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the yield of the same will be based on the percentage of rewards

granted by the network and the number of coins you own.
An example would be. Imagine you have 10,000 TRX doing
Staking in Atomic Wallet, and they give you an annualized rate of
return of 5%.
Perhaps, you would have a return of 500 TRX a the end of the
year. The striking thing about this is that your profits will be higher
if the cryptoasset goes up in price.
In addition, staking the protocol guarantees the holders of the
coins that the coin will not be devalued with a massive sale of the
same since it would be an incentive to have the coins saved in the
long term.

How to Staking?
To do Staking, you only need to buy coins that allow you to do it.
To buy cryptocurrencies, I recommend Exchanges such as
Binance, Paxful, or those that are regulated.
Some of the cryptocurrencies whose network allows Staking are
- TRX.
- Vet -Vtho
- Algorand
- Neo-Gas
- Qtum
- XTZ
- ATOM
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There are many others, but you have to research to find the best
suits your investment objectives.
Then, you can investigate if within Binance there is any Staking
available. They always have some. If they have them, and you
want to leave them in a semi-cold wallet (those you don't usually
trade so much), it constantly generates interest with the daily
rewards they give you.
The best for the staking and for you to see its profitability is to
leave it in a term of 5-6 years or more, where you invest in
cryptoassets that have the potential to grow or revalue. That way,
you will be able to earn both the staking rewards and the
revaluation of the asset.

How to calculate the Staking rewards?

To determine the calculation of how much will be the rewards or
rewards within an exchange or platform for having saved the
retained cryptocurrencies, it is necessary to know several
variables and factors of the network that works with PoS, in
addition to how much is the percentage offered by the specific
wallet.
Among the factors involved are:
-The inflationary process of cryptocurrencies, if any, most of them
do not have one.
- The number of coins locked by the investor or saver.
- How long the investor or saver has been staking.
-The platform or wallet and the performance it offers.
- Other factors depend on the project to which the cryptocurrency
belongs.
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For example, the staking offered by TRX is not the same as the
staking offered by the VeChain network with its Vet-Vtho.
The PoS or Proof of Staking networks have a point in their favor,
and it is that they encourage users and participants to keep their
cryptocurrencies in hodl or the network in a blocked way. This
gives more excellent stability to the price of the coin in the long
term.

BlockFi: How does staking work?

Within the crypto market players, we can see how there are
different types of exchanges, some centralized, others
decentralized, known as DEX, with different purposes and
characteristics.
The crypto market is booming. Many people decide to open an
account in an exchange and start investing and the number of
apps and startups born every day.
Within the crypto market agents, we can see how there are
different types of exchanges, some centralized, others
decentralized, known as DEX, with different purposes and
characteristics.
In this segment, we will explain what BlockFi is, how it works, and
the purpose of the exchange.
BlockFi is a centralized exchange where investors can buy and
sell cryptoassets like other well-known exchanges like Kraken or
Binance.
The excellent quality that sets BlockFi apart is the purpose of the
exchange instead of the possibility of earning a passive income
by staking.
Within BlockFi, the user can transfer money from a bank account
or a wallet to BlockFi and start trading within the platform.
78

The practice of staking is similar to depositing money in a fixed-

term deposit. The user deposits cryptocurrencies keeping them
locked inside the exchange without withdrawing them for a certain
period. As the days go by, the same will generate different levels
of interest.
The user's interest in exchange for the blocked assets will depend
on the so-called APY, the so-called Annual Percentage Yield,
where each virtual currency or asset will provide a different APY
level.
In the case of BlockFi, we can see that the average APPY will be
5%, although, for example, in the case of Tether, it will be 9.3%.
When staking, it is essential to consider that the profit value will
depend on the volatility level of the coin we have blocked if the
value of the currency rises, we will have higher profits. Still, if the
level of the coin falls, we will have less and less profit.
It is advisable when staking to do it with a stable currency. In this
sense, we will be able to project how much will be the estimated
profit level that we will receive concerning the APY we use.
However, suppose the investor's profile is a risky one. In that
case, someone looking for high profitability in a short period can
perform staking with high volatility currencies such as BTC or
Litecoin, among others.
Among the different investment techniques in the crypto market,
the staking technique is one of the most conservative ways to
invest.
BlockFi will be an excellent tool since the investor will be able to
do it conservatively using stable currencies or with a high-risk
level using coins such as BTC when it comes to staking.

How to do staking in Binance?

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Something amazing about the crypto world is the many ways

users can participate in it and generate profits. Something that
allows companies like Binance to have the ability to offer dozens
of different products and services for its users. For that reason,
we will tell you what staking is and how to use it in Binance to
invest and earn money.

Proof-of-Work vs. Proof-of-Stake

However, before talking directly about the Binance product, we
must explain what staking is. And to do this, we must begin by
talking about the method of operation of Bitcoin and
cryptocurrencies based on BTC: the Proof-of-Work (PoW).
The Proof-of-Work method is the method by which transactions
are validated within the Bitcoin Blockchain. The network miners
share part of their computing power to perform complicated
mathematical operations, which allow the transaction to be fixed
in a block. The problem with PoW is that, by making miners
compete at the same time to fix transactions on the chain, it leads
to inefficient use of computational power, and therefore to
transactions taking a long time to execute.
To solve this problem, the Proof-of-Stake method was born. It
requires users who want to be miners in a Blockchain to keep a
certain amount of the token they want to mine in their address.
Subsequently, an algorithm will randomly choose one of these
"registered" miners to execute an operation, so there is no direct
competition between miners that slows down the system.
The more tokens you have in your mining account, the more likely
you will be selected by the algorithm to execute operations. This
avoids bottlenecks when the number of transactions in the
network increases and decreases the technical requirements to
become a miner. For, by not competing directly with millions of
mining machines worldwide, PoS miners do not require such
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expensive machines to participate. Prioritizing more the

accumulation of tokens to have more chances of being selected.

Participating in Binance Staking

However, the fact that the technical requirements in Proof-of-
Stake are lower than under the Proof-of-Work method doesn't
mean that they do not exist. Even mining this type of
cryptocurrency requires an initial investment and a minimum
knowledge to run the operation.
For this reason, so-called staking services have emerged. They
offer their users to take care of the maintenance of the mining
operation, while they only have to deposit their tokens at the
mining address. In this way, they try to combine the technical
needs of mining with the incentive to accumulate tokens to have a
better chance of mining the cryptocurrency.
This is precisely the service offered by Binance on its platform. To
access it, we must select the "Binance Earn" option in the
"Finance" drop-down menu located on the top header of the
exchange's main page.
Learning what staking is and how to use it in Binance is very
simple.
Once there, scroll down to the "Fixed Terms" section of the page,
click on "Staking," and then click on "See More," which will take
you to the area of the exchange dedicated exclusively to staking
options.
From Binance Earn, we can access Binance Staking.

Choosing the right cryptocurrency

Once in the section dedicated to Binance Staking, we will see a
list of all the tokens available for staking in Binance. As well as
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the estimated accumulated earnings on our investment, the

number of days we can choose to have our tokens blocked for
staking, the minimum amount we must block to participate in the
staking. And finally, a button to subscribe if the stake is open or a
warning that it is exhausted if no more quotas are available.

Binance offers several options for staking

If the staking in the cryptocurrency of our choice is available, we
can click on "Subscribe." This will display a new menu where we
can see all the information of interest for our stake. Including the
amount of the token that we will block by staking, the time that the
block will last, the date of refund of our money with the profits,
and the estimated interest that we will get.
If available, we will be able to leave tokens of the cryptocurrency
of our choice in staking.

Staking in ETH 2.0

Different from the usual Binance Staking services, there is the
ETH 2.0 stake. This staking option within Binance allows us to
participate in mining the new version of the Ethereum Blockchain,
but with different conditions to the staking of other tokens. To
participate in it, we must go back to the "Binance Earn" section
and select "Staking ETH 2.0" in the "Fixed Terms" menu.
ETH 2.0 is another example of staking and how to use it in
Binance. This will take us to the Binance page dedicated
exclusively to ETH 2.0 token staking, where we will find the
conditions of this service. Basically, and unlike the stake of other
tokens, our deposit for Ethereum staking will be blocked during
the entire phase 0 of implementation of the new version of ETH.
This means that we will not unlock our Ethereum committed to
staking for at least two years.
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However, and to compensate for this, Binance will give those who
participate in this service "BETH" tokens. Each BETH token is
equivalent to 1 Ethereum token and can be used by the user
within the Binance platform in the same way as a regular
Ethereum. Receiving, in addition, the rewards for his staking also
in the form of BETH in his spot wallet.
The amount of BETH you hold in your account will determine the
staking rewards you will receive. Also, when ETH 2.0 phase 0 is
over, we will be able to exchange our BETH for ETH in a 1:1 ratio.
If these conditions are satisfactory, we just need to click on "make
staking" and select the amount of Ethereum we want to commit.
In exchange for our Ethereum, we will receive BETH.

Staking DeFi
Finally, within Binance, we will find another version of staking with
which we can generate profits. The DeFi staking allows us to
participate in decentralized finance projects from the Binance
platform. We can enter this section again from "Binance Earn,"
but this time in the "high-risk options" menu.

DeFi is also important

Through staking DeFi in Binance, we will be able to participate in
the operation of a specific DeFi project, entering our
cryptocurrencies in a smart contract within it with the ease of the
Binance platform. So, we must select the DeFi project we are
most interested in and the cryptocurrency we will be staking within
it. Selecting, as with normal staking, "subscribe" if the product is
available.
If you know what staking is and how to use it in Binance, you will
generate profits.
83

This will bring up a pop-up tab where we can enter the number of
tokens we want to use for staking and the stake mode that best
suits us. We can choose between flexible staking, which will allow
us to get our money back at any time, with only one day of waiting
for it to be deposited in our spot wallet. Or blocked staking for a
certain number of days, with which if we request our money
before we will lose all the accumulated interest.
Before entering DeFi, we must know what Staking is and how to
use it in Binance.
Finally, Binance warns us that, although it seeks to offer its users
only high-quality DeFi products. If any of them faces problems
that lead to its collapse, putting at risk the assets of its users, the
exchange is not responsible for the losses that may occur. So we
must be very careful before choosing this method of staking.

Where can I do Staking?

There are several options for staking.
Being a self-employed validator

It requires technical knowledge to configure, maintain and protect

a validator from hacks. You must be available 24/7 on a server
because otherwise, if you are selected by the protocol and are not
available at that time, you will receive a penalty deducted from
your blocked tokens as a fine, and your reputation will be
affected.
Participating in a Staking pool

These participants pool their cryptocurrencies to increase the

probability of being chosen as validators and receiving the
reward. The pool administrator will keep a fee from the reward for
maintaining the pool.
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Staking in wallets

Some wallets facilitate access to the main Staking pools, among

them: Trust wallet and Atomic Wallet. You only have to send your
tokens directly from your Wallet to the chosen pool, and from the
time indicated by the pool, you will start receiving rewards.
Staking in exchanges

For inexperienced users, staking in an exchange (such as

Binance) is the easiest way to start. The rewards will be lower, but
you are guaranteed more security and liquidity of your position in
compensation.
This is so that you can have your tokens at the moment you need
them. The leading exchanges that offer Staking are Binance,
Bitfinex, and Huobi.
Conclusions on crypto staking

Although the Proof of Work protocol has been criticized for its
high energy consumption, to date, it is undoubtedly the protocol
that has proven to be the most secure.
One of the primary challenges of the crypto community is to make
a blockchain network secure and scalable at the same time.
In this sense, Proof of Stake aims to be a first-layer solution.
However, its recent development has not allowed it to
demonstrate its potential in the face of the multiple challenges
that a network must face to be effectively decentralized, scalable
and secure at the same time.

Some DeFi platforms where you can earn interest in

ETH by practicing yield farming
Key facts:
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- Platforms offer reward tokens for all those users who grant
liquidity.
- Compound added $1 billion new dollars to its available capital
after entering yield farming.
Farmers here, farmers there. Yield farming is the new trend in
decentralized finance (DeFi) that boosts platforms such as
Compound, Balancer, and Synthetix.
What started as a meme among those who leverage arbitrage
and reward tokens granted by cryptocurrency lending platforms is
now emerging as a strategy to get high-interest rates by granting
or requesting a collateralized loan.
What seduces traders and has enabled its big popularity? This
season is that the yield levels offered by yield farming can be very
high. Tony Sheng estimates that an investor can generate a
100% annual return by farming their cryptocurrencies on these
platforms. However, these tremendous gains carry with them the
possibility of catastrophic losses as well.
Cryptocurrency lending platforms are the ones most involved in
this trend, as they have been interested for a few years now in
ensuring constant liquidity in their markets. Because of this,
projects such as Compound, Curve, REN, Synthetix, Balancer,
and even FutureSwap have been allowed to flirt with ecosystem
farmers and give rewards for pledging cryptocurrencies in these
protocols' smart contracts.
The initiatives create an increasingly large and complex
marketplace characterized by diverse farming operations (lending
and withdrawing) occurring simultaneously between different
platforms. Now, we will walk through the fertile lands of yield
farming to glimpse what these services provide and how they can
attract new users to their marketplace.
86

Compound is the most accessible

Compound is currently one of the cryptocurrency lending
platforms that has gained the most exposure to yield farming.
Since the end of last year, the platform was already one of the
most successful DeFi projects in the Ethereum ecosystem, being
surpassed only by MakerDAO.
However, after Compound sought to take advantage of the
meteoric popularity of yield farming and launched its reward
token, the service increased its capital in the last weeks and has
become the protocol with most cryptocurrencies locked in its
smart contracts.
Compound has managed to add a billion new dollars in its
available capital, which flows daily on the platform, by
conveniently launching its COMP token. Users can take
advantage of this incentive system over the next four years, which
will be awarded a "cash back" to all the liquidity providers.
COMP tokens are distributed 50% to lenders and 50% to
borrowers.
So anyone who deposits cryptos on the platform to provide
collateralized loans or, conversely, requests any loan from
another user will be greatly rewarded with a COMP allocation
similar to the money mobilized.
The company has decided that some 2,880 COMP tokens will be
distributed daily on this platform, with a 50% split for borrowers
and the other 50% for lenders. Faced with potentially juicy profits,
some users may decide to lock their cryptocurrencies on this
platform and, in turn, borrow with the goal of earning as many
reward tokens as possible.
In addition to the novel system, Compound has been fortunate
that other companies have decided to facilitate this service for
87

their users, as is the case with InstaDapp. The Wallet developers

created a widget called "Maximize $COMP mining," which helps
users quickly access the functions with just a few clicks and make
leveraged positions. That is, borrowing and depositing
simultaneously for higher profits.

Synthetix is a pioneer
When it comes to yield farming, Synthetix protocol is undoubtedly
a veteran in this trend. At the beginning of March this year, the
platform launched its first incentive program to increase the
liquidity of its marketplace.
The strategy was to provide its users the protocol's native
stablecoin, sUSD, associated with the exchange platform Curve
and iearn. The campaign lasted only four weeks, and a total of
about 32,000 tokens were distributed.
The users who participated in this campaign had to deposit on the
iearn platform the sUSD token or other supported stable
cryptocurrencies, such as USDC, USDFT, or Dai. This allowed
them to generate an allocation in Curve for sUSD, which could
then be exchanged at the Synthetix minting center (Minti) to claim
their rewards.
Although the agricultural yield initiative has now ended, Synthetix
has continued exploring this territory by merging again with Curve
and the REN protocol. In doing so, they opened up a new
opportunity for yield farming with cryptocurrencies anchored to
Bitcoin.

Curve and REN fulfill the dream

With support from Synthetix, Curve and REN are offering a pool
of liquidity incentivized by Bitcoin-anchored ERC-20 tokens. The
campaign will run for about ten weeks and is already underway. It
88

seeks participants to provide platform-anchored tokens such as

renBTC, wBTC, and sBTC to increase cash flow.
Any user who deposits their cryptos in the smart contracts of
these platforms will be rewarded with incentives in the form of
REN, SNX, and CRV, which are the native tokens of these
services and operate as governance tokens. In addition, all those
users who block their bitcoins on the platform will receive
additional BAL tokens (from the Balancer platform) as a reward.
The Synthetix liquidity group offers various reward tokens for its
users. Source: Synthetix.
This is one of the few yield farming using bitcoin proxies, which
has caught the attention of many specialized DeFi traders and
farmers. Also, because it involves token rewards from various
platforms, some users prefer to bet on this campaign to generate
considerable gains.

Balancer also has farmland

Automated market maker (AMM) Balancer is a project that has
recently decided to test the farmland of agricultural yield with
cryptocurrencies. This company launched a campaign for its
users to create liquidity pools composed of multiple ERC-20
tokens.
The protocol plans to issue about 100 million BAL (Balancer's
governance token), of which about 65 million of these tokens are
going to be distributed as rewards among liquidity providers. The
plan is to distribute about 145,000 BAL on a weekly basis for a
specified period.
By means of this commercial strategy, Balancer has managed to
introduce some $30 million new dollars to its cash flow, which has
occurred in no more than two weeks. Numbers that certify the
popularity of these campaigns in the DeFi ecosystem.
89

Will FutureSwap also enter the rodeo?

Although today FutureSwap has no incentive program activated
on its platform, it tested the possibility of rewarding its users with
governance tokens for three days in the middle of this year.
The decentralized futures exchange platform decided to pay
users a percentage of the liquidity they grant to the platform but
deactivated the test due to the explosion in popularity this
generated.
It is not known if FutureSwap will ever again meddle in the lands
of yield farming, but it seems that the experiment had a lot of
success and repercussions. Spokespersons of the protocol
assured that, according to their calculations, an investor could
generate a return of 550% per year just by holding his ethers or
DAI on the platform. A percentage that is tempting for those who
are hunting for high-interest rates in the decentralized finance
market.
Like FutureSwap, it is unknown whether collateralized lending
platforms such as Aave or MakerDAO will also decide for
agricultural yield. What should keep in mind is that as much as
this new financial strategy seems to generate huge profits,
anything with high yield levels tends to be a risky investment. As
ecosystem experts point out, especially if users bet on volatile
assets or open several leverage cycles on different platforms.

What is Uniswap, and how does it work?

It is undeniable: a huge enthusiasm around Blockchain is growing
every day. Many people are getting interested in the technology
that will bring considerable social and commercial disruption in
the coming years.
90

Also, it should be said that Blockchain is a "base" technology. As

the Internet, its function is fundamental: to verify and store
transactions in a decentralized way in a ledger called Blockchain.
The idea behind it is simple, like that of the Internet (a data
transmission network from point A to point B). This allows its
applications not to be limited to a specific industry or a specific
function. Its uses are virtually limitless. In fact, I am convinced that
most use cases have yet to be unveiled; excellent news for
entrepreneurs looking for some highly scalable and disruptive
business opportunities.
One of the areas where Blockchain is having the most impact is
DeFi. For better understanding, I would define it as a way to
generate financial services/products regular in the traditional
financial sector (loans, guarantees, insurance), adding some
differences;
The first and most significant is that they are decentralized. They
don't depend on any central entity (mainly banks) since their logic
of capital movement works by Smart Contracts. This permits them
to be transparent, faster, and more agile products, since - for
example - there is no minimum investment amount, and above all,
they are accessible to everyone as they do not require KYC.
Secondly, there is the fact that thanks to Blockchain technology
and its Smart Contracts, it is possible to create entirely new
financial products/services, impossible with the traditional system.
We are in front of technology with the potential to change the
financial system as a whole and de-monopolize the most
oligarchic sector in the world. And this without counting other
great benefits such as giving ordinary people or even the
unbanked access to investment opportunities and financial
products that were only accessible to a minority.
Now that we are a bit clearer about what DeFi is and why it is so
disrupting, I would like to comment on the UniSwap protocol: a
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DeFi service over the Ethereum network that very commonly

leaves astonished all those who hear it for the first time. Let's get
to it!
UniSwap is a DeFi project created in November 2018 and
developed thanks to a $100,000 funding granted to the
developers by the Ethereum Foundation. In a short period, it has
established itself as one of the most potent protocols in the
decentralized finances world (5th position in value according to
DefiPulse) and the first DEX (decentralized exchange) to
accumulate a critical value. Interestingly, this super project has
been driven by only two developers, who have not generated a
business model around it.
There is no foundation or internal token that accumulates the
value earned in the protocol to allow to finance future
improvements in development or similar things. It's something
that Vitalik Buterin defines as "public pools," DeFi systems that
benefit all those who use them. Here enters the discussion of
whether these projects are profitable in the long term since they
could only be financed through donations in case of problems. On
second thought, Bitcoin is something very similar to public pools,
and for the time being, it is still the most established and essential
Blockchain.
The goal of UniSwap is to permit users to execute "swaps"
between tokens generated on the Ethereum network (mainly
ERC-20 tokens). What does this mean? It's like doing a token
swap. Now, when you want to exchange a token, you are forced
to go through a centralized exchange, pay fees and compromise
some privacy. Not to mention that usually, to exchange one ERC-
20 token for another (say, for example, Chainlink for BAT), you
have to purchase ETH with your Link token and buy BAT with that
ETH. A very high expense in gas and commissions.
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The swap offers another solution: to make direct exchanges at the

atomic level without going through any centralized entity, all
through protocol. Despite how wonderful this sounds, the most
innovative thing about UniSwap is not the "swap" itself but the
logic that has been integrated into the protocol to make this
possible. Although to truly visualize the change that UniSwap
provides, we must first understand how it currently works in
traditional markets.

Traditional Markets
As usual, traditional markets all work in the same way. They still
use an order book to determine the price of an asset.
Marketplaces are algorithmic software that connects buyers with
sellers. With this type of software, you have two possibilities to
enter the market: buying/selling at the market price or
buying/selling at a price you determine. This generates a book of
buy and sell orders that allow the software to identify the asset's
cost since this will always be the value people are willing to buy
and sell.
This strategy is used in any classic exchange. It allows the use of
investment strategies such as algorithmic bots capable of
predicting the future price behavior by analyzing all the orders
registered in the market. Also, you can even simulate levels or try
to position yourself first to be the first to settle the operation. This
system also has specific problems.
Since, in markets with low volume, the price can be very
manipulable, in addition to the fact that in times of big panic where
nobody wants to buy, the price can fall to 0 even though the asset
that is represented (the shares represent the property of actual
companies) is much higher. Without going any further, the
coronavirus crisis has caused more than 80% of falls in some
airlines, even though they are still the same as they were two
months ago. This is why stock exchanges close when there are
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sharp falls, to avoid this panic that spreads worldwide and causes
no one to want to buy, resulting in a free fall in price that will
continue until it finds a level where people are willing to buy.

UniSwap Logic
UniSwap, on the other hand, works entirely differently from
traditional market models, and this is the most fascinating part of
its protocol. First, the idea that there have to be two people willing
to make the swap and that software brings them together no
longer exists. On the contrary, a pool is created that will provide
liquidity so that swaps can be made at any time. This, in turn,
means that there is an incentive for people to lock their tokens in
a pool to provide liquidity for swaps, although we will see this a
little later. Secondly, the price is not determined by buy/sell orders
but by a formula that moves the price every time an order makes
a swap. Something more complex that we better see with
examples.
The idea is as follows: we have a pool with two types of tokens
that can be swapped. Each pool is composed of two tokens (ETH-
DAI). For example, there will be a different pool for each pair that
can be swapped. When a person requires to swap 1 ETH for its
value in DAI, the price at which the DAI to be acquired is paid will
depend on the status of the pool. The more ETH one wants to
swap, the higher the price will be. This formula determines this:
Let's say a person wants to make a swap worth 1ETH and
receive BAT in return. The swap cost is directly related to the
liquidity of the pool, and the total value of the swap that you want
to make, since the more pressure you put on the pool, the more
the swap will cost. This discourages swaps when there is little
liquidity in the pool and encourages swaps when the opposite
happens.
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Before the swap request, the pool has the following situation: it
consists of 10ETH and 500BAT. The "invariant" is now calculated,
a number that cannot vary, and is calculated by multiplying the
amount of ETH * the amount of BAT. When requesting the swap,
the pool has more ETH than before (11), so the Smart Contract
must calculate how much BAT is left in the pool to keep the
invariant at 500.
That is: 500-(5000/11) -> the result will be the amount of BAT it
will receive for 1 ethereum (ETH).
If, in the example, the swap was of less value (let's say 0.1 ETH),
the amount received would change and would become 4.9 BAT.
So the value acquired is proportionally higher than before since
by asking for less from the pool, the pool's liquidity is not so
compromised, and it offers a better price for the swap. Incredible!
Swap --> ETH for BAT
Last example to make it clearer. A person wants to swap the
(ETH-MKR) pool to swap 10 ETH for the corresponding amount of
MKR. Remember that the amount of MKR will depend on
UniSwap, the pool's liquidity, and the pressure we put on it (the
more value we need to swap, the more pressure we put on the
pool). This pool consists of 1000ETH and 470MKR. Let's do some
calculations.
- Invariant = 1000*470 -> 470.000
The situation of the pool has now changed, we have 1010ETH,
and then we must calculate the amount of MKR that the swap
requester is going to receive since we must keep the invariant
stable.
- 470.000 / 1010 -> 465,34
- 470 - 465,34 -> 4,675 MKR
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The applicant will receive 4,675 MKR. If we repeat the example

but requesting a swap of 100ETH, the amount of Maker received
would be 42.72MKR, a percentage price higher than the previous
one, since we have stressed (requested more liquidity) to the
pool, and it has moved the swap price accordingly.
Swap --> ETH for MKR

Liquidity Pools
A question we should be asking is, where does this liquidity in the
pools come from? What kind of incentive is there to freeze your
assets in a UniSwap pool to allow people to realize them?
The swap fees come in, which are 0.3% on swaps where one of
the tokens is ETH and 0.6% when any of the tokens swapped are
ETH. These types of commissions are distributed among all the
people who are giving liquidity to the pool as a reward. This
theme will be of interest to investors, as we may see returns of up
to +90% per annum. This profitability will be given by combining
two variables: the liquidity of the pool and the daily volume.
- Low liquidity - high volume: This is the perfect combination, as
not only will there be a lot of volume and therefore a lot of
commissions, but also the price of the swaps will be high, as the
pool will be stressed every time.
- Low liquidity - low volume: With low liquidity, prices will probably
be high, but there will not be much yield because volume will be
low.
- High liquidity - high volume: This is also a good combination
since the value moved in the pool will probably not be as high as
in cases of low liquidity (the pool will not be very stressed and will
permit swaps at reasonable prices). Of course, there will be a lot
of volume to generate profitability with commissions.
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- High liquidity - low volume: This is the worst combination, as not

only will prices be low (as will commissions), but there will also be
little volume to collect commissions.
This is the reason why UniSwap has indeed grown so much,
being the first decentralized exchange that has actually been able
to accumulate a lot of value locked in its liquidity pools.
It is also important to mention the risks. Although there are none
(since you will lose money, only generate income through swap
commissions), you may get a negative interest due to the fall in
the price of the tokens deposited and not due to the protocol. The
risk - or rather the characteristic of the pools - is that you have to
deposit two tokens (ETH-DAI / ETH-MKR / ETH-BAT...), and
depending on the demand of the swaps, you will accumulate
more of one token than the other. This imbalance gets more
exaggerated when one of the tokens loses value since it usually
accumulates more due to the protocol.
Now, let's clarify when we want to add some liquidity: we must
keep two tokens in that pool, depending on the pair we want to
participate in, and the value of the two must be all the same. For
example, if I want to put more liquidity in the pool of (ETH-DAI) by
putting 1 ETH (170$), I must put 170 DAI (1$). Once in the pool,
the ratio between these two will vary depending on the demand
for the swaps, and generally, due to the protocol, will accumulate
more of the token that has fallen more in value.
Then, your returns will be acquired through the pool token called
UNI-V1 (etherscan). It will represent the proportion of the pool that
you own and which, in turn, will accumulate the returns generated
by the pool. Through this token, you will be able to recover your
investment and collect the returns you generate.

PancakeSwap: What is it, and how does it work?

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PancakeSwap is a decentralized cryptocurrency exchange for

exchanging BEP-20 tokens. If you have used Uniswap or
SushiSwap, then you'll know how PancakeSwap works. Each
works in almost the same way.
The PancakeSwap exchange does not use order books like the
exchanges. Instead, PancakeSwap uses an automated market
maker (AMM) model that matches buy and sell orders directly
with others in a liquidity pool. User deposits hold liquidity pools
and can earn trading fees and liquidity provider (LP) tokens by
providing liquidity to such a pool. LP tokens are redeemable for
the initial principal deposited, plus accrued fees, less any
temporary losses. In addition, LP tokens can be staked, farmed,
and exchanged.
It is not uncommon to clone or copy open source code from a
popular decentralized application (dApp). Particularly at DeFi,
many new projects are based on existing protocols, with
adjustments made to the original code. Simply make some
adjustments to a popular open-source code, create a new token,
name it after your favorite snack, and voila: you have a freshly
baked DeFi clone!
Whether you think cloning is a good or bad thing, it happens a lot
in cryptocurrencies. For example, SushiSwap is almost a clone of
Uniswap. So it should come as no surprise that PancakeSwap
appears to function very similarly to SushiSwap, with a familiar
design and user interface.
However, PancakeSwap is flipping the farming performance
model on its head, introducing a number of new features that
provide an all-in-one performance optimization platform built
around the chip (cake) pancake. In addition, PancakeSwap
benefits from Binance Smart Chain (BSC) security, which could
help convert some DeFi skeptics.
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How to use PancakeSwap and CAKE Token

PancakeSwap makes performance farming simple and fun. To
use PancakeSwap, you will first need to connect your MetaMask
or WalletConnect browser wallet. Although MetaMask is an
Ethereum wallet, the Binance Smart Chain (BSC) design works to
make decentralized applications (dApps) interoperable with
Ethereum wallets like MetaMask.
If you are familiar with the decentralized exchange Uniswap
(DEX), PancakeSwap should be straightforward. The 'exchange'
section is used for token exchanges, while the 'groups' section is
where you get fees for liquidity provision. Finally, the 'farming'
section is where performance farming takes place.
To farm the Pancake token (CAKE), you will need to add liquidity
to the PancakeSwap exchange group. After selecting the token
pair you want to deposit, you are able to start farming CAKE
tokens. As with moving ERC-20 tokens into the Metamask wallet,
withdrawals must be approved first for BEP-20 tokens before
PanckeSwap can withdraw them on your behalf. From here, a
pop-up window will appear showing the transaction amount and
fees. Next, to bet CAKE, you will need to transfer some Binance
Coin (BNB) to your Binance Smart Chain (BSC) BEP-20 address
for future transaction fees.
Upon confirmation of your transaction, select how much you wish
to wager and confirm the transaction. You can check at any time
the number of CAKE rewards you have earned and collect the
newly awarded tokens - this means that CAKE tokens can be
wagered to earn more CAKE!
Also, check out the "farm" page to find which group offers the
highest rewards based on your risk tolerance. Liquidity providers
(LPs) earn 0.17% of all PancakeSwap transaction fees. In
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addition, PancakeSwap LPs also earn FLIP tokens, which are

also available for wagering!
The Pancake (CAKE) token
In September 2020, the Pancake (CAKE) token was launched on
Binance Smart Chain (BSC). CAKE is a BEP-20 token native to
BSC. The CAKE token has performed exceptionally well in 2021,
showing an incredible price spike throughout February. CAKE's
primary function is to incentivize the provision of liquidity to the
PancakeSwap platform.
At the time of this writing, the Pancake token (CAKE) has a
market cap of $335,680,356, selling for $12.03 per Pancake
token, with a circulating supply of 111,566,950 according to
CoinGecko. In addition, CAKE has no maximum supply, meaning
it is a deflationary token, with tokens being regularly burned to
reduce supply.

Agricultural production with PancakeSwap

As an early adopter of smart contracts, the network effect of the
Ethereum (ETHC) blockchain gave rise to a lot of decentralized
apps (dApps) and yield farming protocols. However, many of
these protocols are unaudited, and some are outright frauds.
Since then, advances in the blockchain and DeFi industry have
facilitated improved security measures by enabling the union of
centralized finance (CeFi) and DeFi. A good example of this is
Binance Smart Chain (BSC). Binance Smart Chain is an
ecosystem of decentralized apps that leverage the power and
security of Binance while offering many of the services that
appeal to DeFi users, such as performance farming.
Yield farming allows users to bet funds in exchange for rewards.
Rewards can be combined and used across multiple protocols,
100

allowing users to increase yield by chasing higher interest rates in

various parts of the DeFi ecosystem.
Services for performance optimization are now a common feature
among many centralized crypto platforms. However, it was DeFi
that really popularized the idea of maximizing yield in crypto.
Decentralized applications (dApps) have driven the development
and adoption of blockchain technology and cryptocurrencies. DeFi
Pulse is a website that shows current rankings and analysis of
DeFi protocols. DeFi Pulse's total value locked up (TVL) in DeFi
has grown from around $1 billion to over $34 billion in less than a
year.
The technology behind many performance farming protocols is
unaudited and can be risky. Although these projects often offer
high yields, the rates of these yields are extremely volatile. Yield
culture protocols cost ten cents these days. However, the risk
presented by many strange DeFi platforms should always be kept
in mind when participating in new technologies.

Providing liquidity to PancakeSwap

PancakeSwap's liquidity provider (LP) tokens are aptly named
'FLIP' tokens. FLIP tokens come in different varieties depending
on the pair of tokens provided to a group. PancakeSwap farmers
can lock in their LP tokens and earn more rewards in the process.
So after depositing funds into a PancakeSwap liquidity pool,
earning LP rewards, and using them to farm the Pancake token
(CAKE), users can stake their CAKE tokens by locking them to
receive SYRUP tokens. However, SYRUP was suspended and
rendered useless after a smart contract issue. Instead, users can
now bet on CAKE to earn more CAKE!

PancakeSwap Rates
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PancakeSwap rates work just like other decentralized exchanges

(DEX) and automated market makers (AMM) such as Uniswap,
1inch Exchange, and SushiSwap. Anyone providing liquidity to
PancakeSwap pools will receive 'FLIP' liquidity provider (LP)
tokens along with accrued trading fees. When using
PancakeSwap, traders pay a 0.2% fee. Of this fee, 0.17% is
allocated to liquidity providers (LPs), while PancakeSwap
Treasury burns the remaining 0.03%.
Based on 30,000 blocks per day, fee issuance on PancakeSwap
amounts to approximately 750,000 daily Pancake token (CAKE)
rewards. Of this, 60% goes to farmers. CAKE token holders
receive 40% of the rewards per block. However, with future
governance proposals, these rates could change.

Why rely on Binance Smart Chain (BSC)?

Ethereum has been the go-to blockchain for decentralized smart
contract-based applications (dApps) for several years. This is due
to Ethereum's early adoption, which gave the second-largest
blockchain an edge over any competition. As this technology was
beginning to develop, the network effect of Ethereum-based
decentralized finance (DeFi) protocols has resulted in tremendous
growth and continued development and adoption.
However, there are concerns for some Ethereum-based
developers regarding high gas rates, speed, and network
congestion. Many people think this could hinder the mass
adoption of crypto. However, several measures are being taken to
address this issue through scaling and interoperability in
Ethereum 2.0.
Regardless, many crypto projects are opting to build other
blockchains due to their lower transaction fees and less
saturation. One such blockchain is Binance Smart Chain (BSC).
BEP tokens are a native token standard of Binance Smart Chain
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and the focus asset of the PancakeSwap protocol. BSC has

considerably lower fees than Ethereum, which lowers the barrier
to entry for adoption and creates a cost-effective and secure
platform for creating dApps.
Additional features
As if the PancakeSwap team didn't have enough on its plates, the
project also has several other features that bring more utility to
the platform. These also include a platform for initial farm
offerings (IFO) and a marketplace for non-fungible tokens (NFT) -
here. You can trade tokenized assets, including Google, Tesla,
and Netflix shares!
In addition, PancakeSwap offers several community incentives to
encourage participation, such as a lottery whereby Pancake
(CAKE) token holders can purchase tickets for a chance to win
prizes. In addition, CAKE token holders oversee the proposal
process to add new token pools to the PancakeSwap protocol.

What is Sushiswap? A new term, 'Vampire Mining,'

has been born.
Sushiswap is a new project that has managed to block more than
1 billion dollars in its protocol in just five days. This fact has
changed the DeFi ecosystem and has permitted UniSwap to
position itself as the protocol with the highest TVL (Total Value
Locked) in the DeFi ecosystem. With this, the cost of gas has
skyrocketed, and Ethereum miners are generating about
$800,000 every hour.
Sushiswap is the first case of VCs versus communities. This
project, which did not have tokens, has gone on to give them
value. A project like Uniswap, which VCs have funded, is able to
become a fork and give all the equity to the people who are using
it. This is what is called Vampire Mine.
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"We will see if the community can keep all the benefits of a
product funded by VCs," said Jesus Perez, director of Crypto
Plaza and Digital Assets Institute, in one of his speeches at the
digital event "Liquidity Mining - Sushiswap," broadcast live on
September 2.
Yield Farming and other more aggressive incentive strategies
through protocol governance tokens, have caused, in a few hours,
a roller coaster in many projects. In addition, inflation and other
projects that are usually not audited have generated concern
within the community.
For example, in the past week, the token launched HotDog has
dropped 99.99%. However, if you look at the project in more
depth, it seems much more interesting and a philosophical
disruption for DeFi in open source projects.
To understand SushiSwap properly, it is essential to review what
UniSwap is and how it works. It is one of the most consolidated
protocols in DeFi, and you can find all the information in this
Cryptoplaza post: "What is Uniswap? How do pools work?"
"Uniswap is a decentralized exchange that permits exchanges or
swaps between a wide variety of tokens such as Ethereum,
Maker, DAI, USD Coin, BAT, etc., and is considered one of the
main projects in the DeFi (Decentralized Finance) space."
These swaps are achieved by those who deposit their assets in
pools to provide liquidity to traders looking to make these
exchanges. It leads to a return through the fees generated by the
protocol. UniSwap does not use a buy-sell order book as
centralized exchanges use, but an AMM (Automated Market
Marking) system that allows the pool always to remain balanced
and to price assets in a decentralized way.
UniSwap was born as an open-source protocol, allowing external
developers to make a hard fork of the project.
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Sushi Swap and decentralization

In short, Sushi Swap is a hard fork of Uniswap and includes a
native token. That is a governance token that you want to
distribute among the community to give them voting power.
UniSwap is a DeFi project with no decentralized governance and
is owned by a company with some VCs. They get a good return
as it is one of the most profitable protocols in the whole
ecosystem. This means that the company takes 0.05% of each
swap as profit. Recall that Uniswap is a project that started
without capturing value.
When a hard fork manages to take all the business of the 'forked'
project, it is known as vampire mining. "A mining strategy is done
to take all the business to another project that is forked.
Sushiswap is a project that has been copied and is going to
create tokens. A project that is not audited and that gives 5 ETH
to the one who audits it", assured Jesús Pérez in one of his
speeches last week.
"The community, the liquidity, the team that is able to evolve it...."
are some of the characteristics that Uniswap has before its
competitors, and that is reflected by the attendees to the digital
event Liquidity Mining - Uniswap.
A forked protocol can eat the original one through a system of
incentives and a protocol that rewards the community better. With
SushiSwap, a network effect can be applied to fork projects and
give more power to the community in exchange for them
transferring all their funds to these new protocols.

Comparison with the traditional world

"Imagine if a Spanish bank could be forked, would you become a
customer of that bank? If I went to some clients of a Spanish bank
105

and told them that I had created Cryptoplaza Bank. After signing a
document reflecting the funds/money they have, I would offer
them some shares that would make them shareholders of the
main Spanish bank", explained Jesus Perez to compare the
situation with that of a Spanish bank.
In the case of being able to fork a bank, a manager that we can
call 'MasterChef' announces that he will fork the most prominent
Spanish bank and, to all those customers who have their savings
in it, offer them shares once the fork is generated. In this way, all
those customers would become part of the largest bank in Spain
and, in addition, the would-be owners.

Operation of the Sushiswap protocol

SushiSwap is a set of smart contracts that let farming of future
SushiSwap governance tokens. It is an exchange for depositing
UniSwap Liquidity Tokens (LP) in this smart contract. Thus,
UniSwap has multiplied its LTV because to participate in Sushi's
farming. You must deposit liquidity in UniSwap.
These smart contracts will allow a complete migration, the
objective of this first part of the farming, and share the voting
power of the future protocol. Fees have also risen in recent days,
as has the price of some tokens.
In short, in 5 days, 67% of the value deposited in UniSwap is
locked in Smart Contracts of an unaudited protocol that promises
the future. This demonstrates the immaturity of the DeFi
ecosystem as it is known today because despite making sense,
the risk is too high.
SushiSwap has asked large auditing firms to audit their contracts
in exchange for 5 Ethers, and some have accepted the challenge
without finding any bugs.
106

Distribution of Sushi Tokens

Sushi Tokens must be distributed through liquidity mining or yield
farming. To learn more about these terms, you can read the post
"What is Liquidity Mining." Those who deposit UniSwap LP tokens
of these pairs into SushiSwap contracts will be mining Sushis.
- USDT-ETH
- USDC-ETH
- DAI-ETH
- sUSD-ETH
- COMP-ETH
- LEND-ETH
- SNX-ETH
- UMA-ETH
- LINK-ETH
- BAND-ETH
- AMPL-ETH
- YFI-ETH
- SUSHI-ETH
Even though the peers can change through community votes,
these are the ones that are initially remunerated. These incentives
started at Ethereum block 10,750,000 and will be reduced after
100,000 blocks (2 weeks). During both, more than 1000 tokens
will be generated for each block (10 seconds) which are going to
be distributed among the community.
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These types of protocols may continue to emerge. While they

dilute the liquidity and value offered by some protocols, they may
also come to improve their tokenomics and governance system to
give more and more power and rewards to the community. DeFi
protocols may need to adopt new strategies to build more loyalty
to their community and better distribute the value they generate to
avoid cases of vampire mining.

What next?
Scenario 1. SushiSwap fails to build loyalty among its stakers.
- 10% of the liquidity remains in the protocol.
Scenario 2. SushiSwap convinces a part of them.
- 30% of the liquidity decides to take the next step and pass on
the liquidity.
Scenario 3. SushiSwap convinces everyone.
- 90% of the liquidity decides to take the next step and become
part of Uniswap.

Top DeFi portfolios

Decentralized finance (DeFi) is a totally fast-growing market, and
a significant part of its growth depends on DeFi wallets. Even
though Defi portfolios have been inefficient in the past, great
strides have been made in recent years, and the portfolios are
getting better and better.
Defi portfolios allow for independence, flexibility, and
accountability while ensuring that users are always controlling
their own funds.
108

As the number of DeFi portfolios grows every day, there are

essential features to consider when choosing a portfolio. You
must conduct thorough research when choosing a wallet.
In this article, we're going to look at what DeFi wallet is. And the
best DeFi wallets currently available. Let's take a look at this
guide now,

What are Defi wallets?

The primary purpose of a Defi wallet is to allow users to store
their own funds without relying on a third party to store their
currency. Basically, it leaves you with the absolute power to do
whatever you want, in control of your assets. Now, the only
person responsible for your funds is you, which is a very
innovative concept.
Defi users do not need to provide any background information or
verify their identity, as in the case of centralized wallets. Basically,
all Defi wallets are accessed by connecting a web wallet3. The
wide range of DeFi wallets are mostly Ethereum native and
support ERC20 tokens, Ether tokens, and ERC721 tokens.
Defi wallets are non-custodial wallets with a specific key pair, and
the user is responsible for keeping their private keys secure. This
is somewhat different from a centralized wallet, where the
platform can help you restore your keys.

The best DeFi wallets

1.Ledger Nano S
It is a hardware wallet that supports different currencies and
tokens. It can be connected to any of the USB ports. You have
been provided with a side button and OLED display on the device.
You can use the button to view and check all your transactions
and your balance in the Wallet.
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It is under constant development and is backed by an excellent

support team, with more currencies to be included in the future.
Ledger Nano offers some of superior security features. It is
protected by passwords, PIN codes, and initialization keys. These
characteristics make it one of the most popular and secure wallets
for the ERC20 platform.
2.MyEtherWallet
MyEtherWallet is a web platform that allows users to create a
cryptocurrency wallet. The specific feature this website has is that
once you generated a wallet and downloaded it to your computer,
you are the only one who owns the public-private key pair.
MyEtherWallet is an open-source platform that only works with
ETH. It is also compatible with other wallets. It works as a
browser to access the Ethereum network. It allows you to store
and send Ethereum and will enable you to access decentralized
Ethereum applications. The file you download is always protected
by a password that you insert while creating a wallet in
MyEtherWallet. Therefore, you must upload the file to the website
when you decide to send your ETH to someone else.
3. Brave Wallet
Brave Wallet supports ETH and most regular ERC-20 coins, plus
its own 'MURCIÉLAGO' cryptocurrencies and collectibles. Brave
Wallet has a fast and quick graphical user interface. Two-step
authentication provides enhanced account security.
The password and passphrase are owned and stored only by the
end-user. Users have complete control over their wallets. If
necessary, they can export their own private keys whenever they
wish.
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Brave wallets are installed in the Brave web browser. The primary
purpose of these wallets is to hold your BAT tokens and perform
other transactions.
4. Trezor
TREZOR was the first hardware cryptocurrency wallet founded for
Bitcoin. It provides an extremely high level of security. With a
quick setup, there are no difficulties associated with its use, as
TREZOR is really intuitive and easy to use. It also supports
multiple wallets by adding passphrases.
The company develops a Google Chrome module to optimize the
communication process for Trezor hardware. TREZOR is also
considered a multi-currency wallet that protects your data with
SSH login. Apart from that, the device cooperates with many
reliable services to guarantee you maximum convenience and
security.
5. MetaMask
MetaMask is a web wallet that is completely free to use. The
MetaMask browser allows you to store, send and manage your
ERC20 coins. Users have complete control of the Wallet's private
keys. Users can seamlessly switch between their own web
browsers and the Ethereum network.
Users can also access DApps and smart contracts securely
through this Wallet. MetaMask has not suffered significant hacks.
It uses HD backend configurations and has a strong community of
developers who update its open-source code.
6. Atomic Wallet
Atomic Wallet is a desktop wallet compatible with Ethereum. It's
one of the best wallets in the system as it supports all ERC20
coins. Users have total control of their private keys and seeds.
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They are all stored on the device, and none are shared on the
browser or server.
Users are still encouraged to store their initial passphrases for
future use securely. Atomic Wallet is also available on Android
phones. An iOS version will be released soon. Another unique
feature of Atomic Wallet is that it has its own official token called
AWC.
7. Coinomi
Coinomi is a mobile wallet. It is a multi-currency wallet and
supports all forked currencies. Coinomi also supports ERC20
coins and is backed by an excellent set of developers. You have
absolute control of your funds as it stores all your private keys
securely within the Wallet itself.
This HD wallet is protected by a PIN code, a passphrase feature,
and a seed code. However, you must activate its token function
by adding your token set. There is an option to download the
Coinomi app on your Android phones. The iOS version will be
released shortly.
8. Trust Wallet
Trust is a mobile wallet. It supports ERC20 coins and also
ERC223 tokens. Trust Wallet permits users to send, receive and
store a wide range of cryptos. It's an open-source wallet with a
straightforward design. It aims to provide a platform that is easy
and simple to set up and use.
It also features excellent security features as all users' private
keys are stored locally. The trusted Wallet supports multiple
currencies such as Ethereum, Ethereum Classic, EOS, Callisto,
Otum, BAT, Augur, and other ERC20 coins.
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It can also connect with other DApps through this Wallet. Trust
Wallet has also partnered with the Kyber network that allows you
to trade with other exchanges.
9. Lumi Wallet
Launched in 2017, Lumi wallet is an easy-to-use cryptocurrency
wallet suitable for new and experienced users. The Lumi wallet is
a hierarchical deterministic wallet that uses a 12-word master
seed key. This Wallet is available for the web and for a mobile
platform compatible with Android and iOS.
The Lumi wallet is a multi-coin wallet that supports Bitcoin
Ethereum Bitcoin Cash, EOS, and ERC20 tokens. It is a product
of Lumi Technologies. It is an open-source web and mobile wallet.
Users can exchange their tokens within the Lumi wallet because it
has a built-in Changelly exchange.

Top 5 DeFi Games to Farm NFTs

The world of video games has presented changes in recent times,
so much so that they have put on their skates to enter the fast-
paced universe of cryptocurrencies.

What are NFTs?

In comparison, an NFT or ERC-721 token is unique and carries
unique identifiers. In this case, this is what gives the NFT its
value, like Bitcoin, its scarcity. Dapps like CrypotKitties and
Cryptopunks pioneered the hype of NFT collectibles and continue
to lead the space today.

Node Runners
What is Node Runners (NDR)?
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Node Runners is an open-source cyberpunk-themed game that

aims to bring DeFi and NFT enthusiasts together to fight for a
"decentralized tomorrow." The game's action takes place in a
dystopian future, where each player's goal is to become the Node
Runner by acquiring Hero NFT cards, increasing their strength,
and fighting villains in 1-on-1 battles.
NDR is the utility token, and it can be used for Liquidity mining
and NFT purchases. Serve as life points in the game. Used for
governance to determine rates and resource allocation.
What makes Node Runners unique?

Node Runners combined liquidity mining with NFT collectibles

and introduced the first "NFT farming and participation" model.
The game allows its users to receive NFTs as cash withdrawal
rewards and wager those NFTs to acquire NDRs. Players can
also enjoy gamification elements, such as fighting villains and
PvP battles.
Node Runners also have permanent sources of liquidity. 90% of
NFT sales made in ETH are used to provide and lock in NDR /
ETH liquidity. There is a 2% fee on the transfer, which is also
allocated for liquidity blocking. Thanks to Matic Network's L2
scaling solution, Node Runners players can interact with smart
contracts utterly free of gas fees.
What was the distribution of NDR tokens?

A total of 28,000 NDRs were minted, 45% of which were

airdropped to 500 people (25.2 each) at launch. Another 45%
were locked in as gambling rewards in two groups, 5% were used
as a liquidity lock for one year, and the remaining 5% were
reserved for marketing and development purposes.
Buy them with ETH
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When buying NFTs with ETH, 90% of these funds will be used to
buy $ NDR Tokens from the market and provide NDR/ETH
liquidity. This will help stabilize the $ NDR Token ecosystem and
create constant buying pressure.
NFT Staking

At this point, the platform will have a designated section for NFTs
Staking. You will be able to bet up to 4 heroes or support cards
simultaneously to receive the highest possible return. It is
important to remember that each NDR $ transaction will include a
2% fee, which will be used to pay out rewards for staking NFTs.
Fighting villains

Once the army of Node Runners is ready for the fight, we will
launch a series of NFTs called "Villains." Villains cannot be
bought or bribed. They can only be defeated. The platform has a
designated section to initiate fights against villains using your
Heroes and Support cards. The purpose of each battle is to
defeat the villain and claim your card!
Blocking Villains

Not only can you defeat and claim the villains' cards, but you can
also gamble them (i.e., lock them in jail) and earn NDR $ as
rewards for gambling!
Player vs. Player Rooms

Even after all Villains are defeated, peace between Node Runners
is not guaranteed. At this point, the platform will have a
designated area for 1-on-1 battles, where Player A can defeat
Player B and claim his wagered NDR and NFT $ cards. The
stakes are transferred to the Winner of the game.

Cometh
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What is Cometh?

In a nutshell, Cometh is a DeFi technology spaceship game with

performance-generating NFT. Cometh is a strategy game in
which players can earn tokens that can be used within the DeFi
ecosystem.
The goal is to place the spacecraft near the asteroids as they
pass by. When you are close enough, you can extract tokens.
The better the ship, the more tokens you can earn.
Creating new asteroids is a decentralized process left to the
Cometh Generator, which is simply a smart contract that can
collect all kinds of Ethereum-based assets, such as ERC-20
tokens, including shares of a decentralized exchange liquidity
pool and ETH.
Once a threshold of accumulated tokens is reached, anyone can
call the Cometh Generator and trigger the deployment of a new
smart asteroid.
As mentioned above, as a player, you control spacecraft that are
sometimes referred to as "astrominers" and orbit asteroids. In the
game, spacecraft are ships capable of mining asteroids. On the
blockchain, spaceships are represented by non-fungible tokens
(NFT).
The MUST token

MUST is a token that is used to price in-game mechanisms and

can also be wagered to redeem more spaceships. Players
wishing to acquire the token can purchase it from Uniswap. Those
who own MUST and provide liquidity to the ETH / MUST pool will
earn more tokens as a reward.
Along with launching the first version of the game on February 8,
2021, Cometh will also launch a decentralized Uniswap-style
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exchange (Comethswap). This will handle exchanges between

ERC20, ERC721, and ETH between the Ethereum mainnet and
Layer 2.
Comethswap will be opened with several token pairs with MUST.
Their respective liquidity reserve tokens will be transferred to in-
game asteroids, where players can mine them with their NFT
spaceships.
NFT Spaceships

NFT ships are available for purchase and trade-in OpenSea now
with the added bonus of a 30% rebate for each new spaceship
purchased. The average price is currently set as 0.4 ETH, but we
already see ships listed above that value.

DeNations
DeNations is a blockchain-powered metaverse. It launches the
first INO (initial nations offering) offering five nations to the public,
which is already popular in the blockchain industry as a token
economy platform, has launched the blockchain-based
metaverse, DeNations. DeNations is a decentralized blockchain-
powered metaverse where anyone can manage nations, cities,
and civilizations.
Metaverse combines 'meta,' meaning 'beyond,' and 'universe,'
meaning a virtual space that interacts with the real world, where
people can participate in economic, cultural, and social activities.
Currently, services that gamify a metaverse have already been
launched in the blockchain industry, such as Decentraland and
Roblox. DeNations closely connected the real world with the
metaverse and was designed to generate profits while playing.
DeNations users’ own nations and can build cities and
civilizations. Users can earn money by taxing and farming tokens
from nations, cities, and developing civilizations. Nations, cities
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and civilizations receive Ethereum Non-Fungible Token (NFT)

cards, proving their authenticity and ownership, even outside the
game. NFT cardholders develop nations, cities, and cultures in
DeNations and earn tokens and profits. Several national policies
are determined by the quadratic voting proposed in Eric Posner
and Glen Weyl's book. DeNations develops nations, cities, and
people in the direction that NFT card owners point.
Currently, 5 NFT cards for France, Italy, Japan, Korea, and India
are already sold at Opensea. Each Nation NFT card is issued in
limited quantities and sold at a 50% discount during the first week
of launch only.
"Individuals in the real world can't build and manage nations,
cities, and civilizations," said Justin Jang, vice president of
DeNations.
DeNations seeks to become a leader among blockchain-powered
metaverses. It is expected to contribute to relevant ecosystems
within the blockchain-based metaverse and positively impact the
real world as a national management simulation gameplay
because users can experience and experiment with the political
and economic systems in DeNations.

AnRKey X
AnRKey X has been causing quite a stir on Rarible. Last week,
they catapulted to the top of the vendor list with the launch of
GenSys X, a new NFT set selling for 120ETH with a pre-sale of
nearly 3x oversell. The launch sparked a surge in sales that
caused their Rarible page to crash, meaning orders could not be
processed for a while.
The NFTs represent characters from AnRKey X's impending NFT
and Esports challenge game, Battle Wave 2323. Battle Wave
2323 is a combination of decentralized finance with e-sports,
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steeped in a cyberpunk aesthetic. Developed in Unity, the game

allows players to choose a team and compete against each other
in liquidity extraction processes by buying, betting, and playing
with NFT powered by APY.

Chain Guardians
Did you ever imagine that anime could one day enter the crypto
space? Many cryptocurrency users have long desired the idea of
anime characters entering the cryptosphere. A unique platform
accomplished this in 2021. This platform is known as
ChainGuardians.io. It is a collectible cryptocurrency and anime-
themed blockchain game. The game assets are represented as
unique ERC-721 tokens based on the Ethereum blockchain.
ChainGuardian. ChainGuardians' vision is to create one of the
most enjoyable blockchain gaming experiences globally by
combining traditional gaming concepts with blockchain
technology. In addition, the ChainGuardian platform hopes to
develop a gaming platform that is capable of operating in existing
or developing virtual worlds. The ChainGuardian platform can
also be used as a virtual asset or even as a completely separate
entity.
What exactly are the types of assets?

On the platform, there are assets, including weapons and armor,

secondary characters, and digital collectibles, also known as
crypto-collectibles. Therefore, all collectible assets can be
implemented in the game and are all represented as unique ERC-
721 non-fungible tokens on the Ethereum blockchain. Doing this
ensures that the assets are unique and prevents them from being
duplicated or counterfeited. In addition, all collection assets will be
limited in quantity. This helps ensure their scarcity and value
within the markets. Users will also have the option to buy and sell
the assets in the secondary markets of non-fungible tokens.
119

What makes ChainGuardians different from other crypto gaming

platforms?

The idea of "Pay to Win" has been a big problem in many of

today's top games. These tactics often hinder the entry of new
players and limit the game from reaching its full potential. In
addition, many of the blockchain games have unique ideas, but
many can't go beyond presale. So what is ChainGuardians trying
to do differently?
ChainGuardians is trying to change the market with the following
protocols:
- Receive regular feedback from the community
- Focus on final game content development and gameplay
advancements.
- Multiple game modes, including PVP, PVE, and collaborative
PVE raids.
- With the balance of Guardians, lower-ranked characters, items,
and economy.
- Continued development of battle metadata and 'elemental' type
balance.
- Allow 'Bring your own NFT.
- The 'loyalty system
- Testing, balancing, and in-game simulations
- Whitelisting via SafeName to avoid bots and also excessive
multiple account creations
- Multiple events and competitions.
So, is there a tab or something?
120

The ChainGuardians platform has its own $ CGG governance

token. There are two main ways to earn $ CGG. One is to wager
any NFT that has been added to the NFT Mining game. By
earning block rewards, users will receive ChainGuardian Credits
(CGC) that can be converted into ChainGuardian tokens (CGG).
Another via to earn tokens is by playing the ChainGuardians role-
playing game - so you'll fight through the Cryptoverse and be
rewarded with CGC every time! More importantly, the $ CGG
token will allow you to earn POWER rewards (liquidity provider
token) by providing CGG pairs, bet POWER tokens and earn
CGG (APY), take CGG to earn exclusive NFT and partner tokens,
and finally vote on vital decisions, regarding the ecosystem.
What exactly are the games on the platform?
ChainGuardians has two main games: its NFT PoS Mining game
and its role-playing game. With the PoS Mining game, you will be
able to bet NFT for passive income. The game is also associated
with several major NFT projects that make the experience unique.
As for the role-playing game, it has partners with several major
blockchain games. The concept of this game is a turn-based
strategy game to win. ChainGuardians is also developing its new
PVP Blockchain Superheroes game that will allow players to play
against each other.
Let's talk about the game mechanics

The ChainGuardians game is controlled solely by the player and

is a battle-based game that is active in real-time. When players
are not online, advanced AI-based battles will take place, all
governed by the attributes of the Guardians. Then, in the game,
you can strategically conquer locations such as castles,
fortresses, and dungeons or even set up camps with defensive
attributes. You will also be able to ambush enemies by night or
day. Then, the main objective of the game will be to loot and
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eradicate your enemies. The game allows you to participate in

Chain-Battles with other players for even greater rewards.

Top 5 exchanges to invest in cryptocurrencies

1- Binance

According to the many exchanges to invest in cryptocurrencies,

Binance is the number 1 in market capitalization among the many
exchanges to the CoinMarketCap volume ranking. Trading
cryptocurrencies on this exchange is very straightforward and
intuitive.
One of its most significant advantages is that it has its own token
(BNB) that allows paying the transaction fee with substantial
discounts. In addition, its platform is continuously adding some
new options.
2- ByBit

The ByBit exchange is one of the biggest in the derivatives sector.

It currently occupies the fourth position.
It has various opportunities to trade in the cryptocurrency futures
market, such as perpetuals and inverses. It also counts with very
competitive commissions.
The ByBit exchange constantly offers promotions, so it is
advisable to visit its official site periodically.
3- CoinEx

CoinEx is one of the fastest-growing disruptive exchanges in the

crypto market.
Apart from offering cryptocurrency exchange, the exchange
provides a wide range of services, including perpetual contracts
and the possibility of trading with leverage.
122

In addition, it has an ambassador program. There, it's even

possible to earn up to 50% commission for completing some
marketing tasks. For more info about CoinEx, you can visit its
official website.
4- Gate.io

Gate.io is a crypto exchange where you can get newly released

tokens. It also has many other functions, such as futures and
ETFs.
Its trading volume is much lower than the leader Binance, but its
ease of use and the amount of functions it offers makes it worthy
of the ranking.
One of its greatest advantages is that it has its own token (GT),
which can be used to obtain trading discounts.
5- Bittrex

Bittrex is one of the most reliable Exchanges to invest in

cryptocurrencies for online trading, as it has high liquidity and
more than 100 tokens to trade.
It has hundreds of cryptoassets to trade, along with very high
liquidity.
Decentralized finance is a set of applications based on
'blockchain' networks that, in principle, do not need intermediaries
to function. The rise of these financial products, which have
similar characteristics to traditional services, could change the
finance sector to some extent and brings with it opportunities and
challenges.

Decentralized Insurance
123

To participate in DeFi, one must lock tokens in smart contracts.

Tokens locked in smart contracts are potentially vulnerable to
smart contract exploits due to the large potential payout. While
most trustworthy projects have gotten their codebases audited,
one will never know if the smart contracts are truly safe.

Remember: in the DeFi world, there is always a possibility of a

hack that may result in a loss.

One of the highest-profile exploits involved a DeFi Dapp known as

bZx. The platform suffered two breaches in February 2020 and
another in September 2020. The first exploit on 15 February 2020
resulted in a loss of 1,193 ETH ($318,000), while the second
exploit on 18 February 2020 saw 2,388 ETH ($636,000) lost.

Finally, on 13 September 2020, bZx was hacked the third time,

losing $8.1 million, nearly 30% of its total value locked.

In all, bZx experienced a loss of almost $10 million in 2020. These

breaches involved highly complex transactions involving multiple
DeFi Dapps. More hacks have occurred since then. The fourth
quarter of 2020 saw no less than five high-profile attacks against
several popular DeFi Dapps.

In October 2020, Harvest Finance, a yield farming protocol, was

attacked by a hacker who withdrew $50 million through flash
loans. Subsequently, in November, Akropolis, Value DeFi, Origin
Protocol, and Pickle Finance all suffered varying degrees of
security breaches. Altogether, the attacks amounted to a
staggering $69 million loss for the DeFi space.

These hacks show that exploits can still occur even though these
Dapps had been audited beforehand. The potential for such
massive losses highlights the inherent risks in DeFi and is
something that many users do not pay close attention to.
124

Here are some of the risks that DeFi users face:

1. Technical Risks - where smart contracts could be hacked or

bugs could be exploited.

2. Liquidity Risks - where lending protocols (e.g., Compound)

could run out of liquidity.

3. Admin Key Risks - where the master private key for the
protocol could be compromised.

The risks highlight the need for buying insurance if one is dealing
with large amounts on DeFi.

This section will cover two major providers of decentralized

insurance to help you protect your DeFi transactions, namely
Nexus Mutual and its broker, Armor. Additionally, we also briefly
highlight other insurance platforms such as NSure Network and
Cover Protocol.

What event is covered by Nexus Mutual?

Smart Contract Cover offers coverage against smart contract

failures, protecting against potential bugs in smart contract code.
The coverage intends to protect against financial losses due to
hacks or exploits in the smart contract code. Note that this
insurance product only protects against “unintended uses” of
smart contracts. Security events that occur through negligence
(such as the loss of private keys) are not covered.

Custody Cover aims to protect users who put funds into

organizations that hold user funds and assets, such as centralized
exchanges and centralized borrowing/lending platforms. Users
will be covered in events where: 1. The custodian gets hacked,
125

and the user loses more than 10% of their funds, or 2.

Withdrawals from the custodian are halted for more than 90 days.

DeFi according to the World Economic Forum

Interest in cryptos and decentralized finance (DeFi) increased

dramatically during the pandemic, according to the World
Economic Forum. "Decentralized finance seeks to transform
traditional forms of finance by rebuilding and reinventing
services," the body says. But what exactly is decentralized
finance, how does it work, what are its advantages,
disadvantages and challenges?

Javier Ibáñez, co-founder of Alastria and director of the FinTech

Legal Observatory at Comillas Pontifical University, explains that
decentralized finance are "financial contracts (loan and
investment, above all) with 'blockchain' support or form, and
therefore annotated in an immutable blockchain." The blockchain
is a database of which all users keep a copy. That is, it is an
immutable ledger that contains the complete history of all
transactions that have been executed on the network.

"It is a huge database distributed among many actors, secure

thanks to encryption and can be applied to any type of
transaction," says Sergi Simón, coordinator of the Risk
Management programs at the EALDE business school. The
expert explains that decentralized finance refers to a set of
applications that aim to create "an open financial system, more
transparent, more secure and outside the control of
intermediaries".

As explained by the company Decentralized Finance, DeFi is "a

set of systems that allow the exchange of value ('tokens') from
point A to point B (between wallets) without intermediaries". Each
126

decentralized finance project is different and offers certain

characteristics, risks and opportunities. Decentralized finance,
according to Professor Ibáñez, "works with DeFi support but
produces legal effect in the same way as traditional financing
contracts."
The way to implement this type of finance is through
decentralized applications that are developed on public
blockchain networks such as Ethereum.

Use cases would include lending, currency exchange or interest

earning. Programmer Juan Nuvreni shows an example in a video
posted on YouTube to help understand how it works: "On the one
hand, we have a lender who deposits his cryptocurrencies on a
DeFi platform managed by a 'smart contract' and every month
receives an interest rate for keeping his crypto on this platform."
On the other hand, there would be the borrowers, i.e. people who
want to get a loan and use the same platform to obtain
cryptocurrencies.

"When they want to repay that loan, they also pay an interest for
having used the platform and in that way the lender and the
borrower interact with these protocols and earn and pay
respectively a variable interest rate without having to negotiate
any terms between them," Nuvreni points out. As he tells it,
everything is driven by an algorithm within the 'blockchain' that
"manages interest rates and collateral prices."

Among the advantages of decentralized finance, Ibáñez mentions

that "the support is secure, very fast and very cheap". But they
also have some disadvantages. For example, as he stresses, the
user must have a minimum knowledge of how this technology
works and be trained, "just as happened with the Internet".
"Especially in terms of access to networks and digital identity,
which is necessary to operate and manage one's own investment
127

portfolio. Otherwise, a third party will have to do it at a higher

cost," he says.

Another challenge to keep in mind is that of regulation. "While

DeFi has the potential to transform all the financial system, it
lacks a clear policy landscape that can help accelerate the
benefits and mitigate the risks," the World Economic Forum said
in a statement released in June. The World Economic Forum has
created a toolkit to guide policymakers in creating policies related
to decentralized finance.

DeFi could transform the finance sector to some extent: "There

will be far fewer intermediaries like the current ones and a few
more specialized ones will emerge, such as custodians of
cryptographic keys, which are necessary for trading, or platform
managers". According to Ibáñez, this type of finance is becoming
more and more widely used: "It is the future and it is irreversible.
In a few years they are likely to dominate the financial market
because of the advantages they offer.
128

Conclusion
Overall, the blockchain-driven decentralized finance space is still
in its infancy. Last year, the monthly number of DeFi users ranged
from 40,000 to 60,000, with 90% using decentralized exchanges.
However, it is also clear that DeFi offers immense disruptive
potential and a compelling value proposition. At the same time,
individuals and institutions make use of broader financial
applications without the need for trusted intermediaries.
Cryptocurrencies have brought about a shift in how money, as we
knew it, works. It moves from the need for trusted third parties
who decree prices and what can be done with the money to a
decentralized system where the community decrees the price and
can do what they want with the money.
DeFi now proposes to take this a step further and bring the
various elements of the conventional banking system into a fully
digital and decentralized environment. They seek to offer
disruptive solutions that simplify traditional banking processes. All
this by eliminating the need for trusted third parties, removing
additional costs from the conventional banking system, reducing
management times, and reducing tedious bureaucracy.
DeFi is a technologically innovative approach to financial trading
that disrupts the status quo in the financial space. With the advent
of DeFi into economic speech, the system has experienced
enormous growth. Due to the market trend and the continuous
technological improvements the industry has experienced, we are
looking at a more decentralized and liberal financial system.
129

Something extraordinary is happening in the financial system:

cryptos are empowering the unbanked. The idea of money is
changing as people accept the new normal, i.e., digital assets.
Large financial institutions see cryptocurrencies in a new light. It's
a fact: the world is witnessing a quantum leap in the development
of banking channels. It is unusual to see an entire sector
transforming so fast in such a short time, and that too from
scratch.
DeFi will soon catch up with conventional trust financial services.
Evolutionary patterns always include ups and downs, which help
generate phases of improvement. DeFi will also undergo
appropriate corrections in the future before it establishes itself as
the 'de facto' financial mechanism to serve the masses. Until then,
there is ample room for technological improvements.
The responsibility given to all involved minimizes the risks
involved with the system to protect savers and interested bodies.
It also demands a responsible system to maximize its potential
and enhance its benefits for all stakeholders.