Well don’t just let them sit there collecting dust! Now it’s become even easier for you to earn interest from them — just like a regular savings account (though maybe a bit better).
DeFi stands for Decentralized Finance. It’s a new way of thinking when it comes to borrowing and lending money.
And Coinbase — one of the world’s best cryptocurrency exchanges — recently integrated DeFi directly into the wallet app which customers use. In this same article, Coinbase also defined what DeFi is:
“DeFi borrowing and lending apps are “smart contracts” or programs that run on the Ethereum blockchain. After you deposit your crypto into the DeFi contract, the contract then loans your crypto out to borrowers who pay interest. The contract dynamically manages interest rates based on the supply and demand for loans.”
That’s not all. These DeFi loans work because the smart contract guarantees the safety of the lender’s crypto. How?
Let’s say you have $1,000 worth of Bitcoin or crypto to lend out. Before someone borrows it, they must first put up collateral. Collateral is usually two or more times the amount they wish to borrow.
So, for example, if a borrower wants to borrow that $1,000 from you, they must first lock up $2,000 or more worth of their own cryptocurrency. That way in case the borrower doesn’t repay you or prices fall, the collateral is liquidated and paid to you.
It’s a Win-Win
Both the borrower and lender seem to win from this situation.
Borrowers can HODL. If they have an investment, a car, or bills they need fiat for then they don’t need to sell their crypto. They can put it up as collateral. Then when they repay their loan they can withdraw it.
Lenders can HODL. If they have Bitcoin or other cryptocurrencies they wish to keep for the long haul, then instead of letting them gather dust they can lend them out and earn interest.
As of today, Coinbase is releasing the DeFi option for wallets on iOS. They promise that their Android version will “follow in the coming weeks.”
If you’re ready to go, then you can lend out Ethereum and a bunch of Eth-based tokens such as USDC, DAI, BAT, REP, WBTC and ZRX. Interest rates are calculated in APR and currently vary from 0.03% to 4.17% APR. The rate depends on several factors: the coin you put up as well as the smart contract terms you’ve chosen.
If it sounds complicated, don’t worry. The DeFi dashboard lets you “compare different rates from providers, easily deposit your crypto without opening a web browser, and view your balances on a simple, unified dashboard.”
A word of caution
Do keep in mind that DeFi is a new technology. There are still plenty of problems to resolve. The DeFi volatility which occurred during the recent crypto market plunge rocked the boat and caused some borrowers and lenders to lose money.
That said, after markets settle down later this year or 2021, DeFi might be the killer app that blockchain was looking for all along.
