Decentralised Finance, an activity developed on a decentralised technological base, where you interact through smart contracts in different layers (L0, L1, L2 and L3) and which, due to their digital morphology allow you to connect your money between these different layers in search of the best conditions and financial products to be productive and profitable. In addition to having maximum auditability from anywhere in the world and by anyone, without restrictions. Although this environment can occur in any layer. L1s currently manage most of the liquidity in this market, leading this market share in two areas. Active developers creating and investors taking risk. It is an exciting sector and undoubtedly a challenge full of responsibility for all participants in it. From the most basic exchange or deposit protocols to the most sophisticated options, delta-neutral hedging or insurance. A market made in the image and likeness of all those with a high appetite for risk, but it has never been so easy, direct and efficient to deposit money and obtain a return on it the second you deposit it.
Defi allows you to compose an endless number of strategies through the use of your cryptocurrencies including bitcoin, which is not native, nor received by any network other than the Bitcoin network. You can put a layer that gives it power of invisibility, and it can be used in networks that support and have a bitcoin counterpart in the form of WBTC. Imagine using your bitcoin to make a simple fixed-term deposit, which in turn serves as collateral or guarantee to borrow another asset in the same protocol, which is being demanded in another network and in another protocol, offering a good % APR to arouse your interest and desire to get into debt (take risk). This other protocol also allows you to borrow ETH to deposit them in a liquid staking protocol, which gives you an additional % of APR and gives you a derivative of the token deposited (it gives you a ticket that proves your deposit and obliges you to return the same deposited assets) and with this synthetic asset and some USDT that you swap you set up a pool, which will generate another % of additional APR…….
“Until the Federal Reserve raised interest rates this year, stablecoin deposits earned much higher returns than a bank deposit or a Treasury bill, but at much higher risk, so this use of capital competed with junk bonds or similar ways of earning high returns in traditional markets.”
The problem with DEFI comes from the flexible solution it offers to any type of investor, regardless of their experience, risk management and strategy. It introduces them to a vicious, circular debt, which can collapse at any time, putting them into a destructive spiral of collateral and therefore penalising them over and over again (as many times as they have leveraged themselves). As if these risks were not enough, in 2022 thanks to a study of the Defi ecosystem, it was discovered that 97.7% of the tokens traded on different protocols (Unisawp, Pancakeswap, Curve, Silo Finance, Apeswap, … ) were Rug-Pulls, the famous “carpet pull”, a new form of the stamp-pulling scam, but now applying technology and the intellectual superiority of the developers towards investors, as they are able almost undetected to extract all the value accumulated in the smart contact as the investors’ money comes in. DeFi offers a good working field for hackers/exploiters to do their work.
If you are just starting out in this noble art, remember that “Code is law”, because if there is a mistake in a smart contract, someone can exploit it and feast on your money, but not only on the asset you have interacted with, often all the assets that have nothing to do with it, but are in your wallet, will also be compromised. It is solely your responsibility that this does not happen to you, so act accordingly to the power you have in Defi, and with the responsibility it demands of you. If you prefer to look at it in a less technical way, the SC is always guarded by a clever lawyer, bound to find loopholes in that SC, and help his client abuse the contract in a way that was not intended when it was written.
Therefore, DEFI is a great operating system driven by the liquidity deposited in it, with the objective of moving digital assets to achieve returns. Something unthinkable 5 years ago, but no different to what the traditional banking system offered when it was healthy and good practice, when people deposited their money and banks granted various loans for mortgages and for financing companies, in order to generate profit. Today the alternative is to have funds in DeFi, to assume that there are several direct risks and that you need new skills and training focused on this new financial structure to be able to constantly and with guarantees generate returns of more than 20% per year, otherwise the opposite is to produce directly to your capital a 100% loss…