In this post, I will talk about the alternative finance world (“Decentralised Finance” or “DeFi”) created by cryptocurrencies, specifically Ethereum. I don’t think that I can explain DeFi better than the short write-up by EthHub – so you can read up on DeFi here. Basically, DeFi refers to a number of decentralized protocols building open financial infrastructure.
As of Sep 2019, the DeFi world is still undergoing rapid development and iterations – definitely, NOT considered to be a mature ecosystem yet. However, with that said, one is able to borrow or loan “money” within the DeFi world. You will be able to see the rankings of the various DeFi platforms on DeFi Pulse.
For the purpose of this post, I will focus on Compound Finance. Compound Finance allows anyone to borrow money (with the posting of suitable collateral) and/or loan money (in exchange for interest).
The image above shows the “supply” and “borrow” rates for Dai – an USD-backed stablecoin. 1 Dai is “soft-pegged” to 1 USD; you will be able to exchange your USD into Dai at around a 1-to-1 ratio (+- 0.1 to 2%). If you deposit 1 Dai into the Compound Finance “app”, you will be generating 9.88% yearly interest (based on the rates shown in the screenshot above)! The interest comes in roughly every 15 seconds and you can literally see your money grow in “real-time”.
In your head, you must be thinking that this sounds too good to be true – the prevailing bank interest rates are typically below 2% (absolutely pathetic in comparison). Is there some sort of catch? Yup, absolutely. As mentioned earlier, this DeFi world is still NOT considered to be a mature ecosystem. You will not have any recourse if you sustained any losses due to bugs in the smart contracts (the code for Compound Finance has went through TWO audits. But still.. Who can be sure?) or a plain old simple loss of private keys (equivalent to your “bank pin”) to your Ethereum “account”.
Personally, I have deposited some money into the Compound Finance protocol (as a test) and have earned a few hundreds USD (denominated in Dai) in interest. I will say that it works well for me, but this might not be for everyone.
Are you interested to try this new form of getting interest on your money? Tell me in the comments below. If there are enough interest, I might do a “How to” post on converting your SGD deposits into Dai and depositing Dai into Compound Finance.