Beginner’s guide to the world of DeFi
So you have heard a lot about DeFi but haven’t yet made the decision to try it out? Then this is the perfect guide for you.
In this article, we will discuss why getting into DeFi makes sense, how you can do it easily, and what are the risks involved.
There are primarily two big reasons for you to try out DeFi — healthy yields and making use of the tokens you already hold.
When you invest in a DeFi strategy or program, you’re essentially providing liquidity to a DeFi ecosystem. As a result of providing liquidity, you get paid in interest and rewards from that ecosystem. It’s called yield farming.
Some examples of yield farming are normal staking, liquid staking, lending, etc.
On the other hand, assuming that you own a bunch of crypto coins, they are essentially sitting idle in your wallets. How about making some additional gains from your existing assets?
You don’t have to spend money on anything rather you’re getting paid depending on how well your DeFi investment goes.
Liquid staking is much like normal staking with one key difference. When you stake your asset, instead of completely locking it, you get a new type of liquid asset pegged with your staked tokens.
That means although you’re essentially staking in the primary token, you mint another token that is pegged to your primary token.
In the Stader BNB ecosystem, when you stake $BNB you mint $BNBx.
So you get your rewards from staking your tokens and then you can use the liquid token to use in DeFi.
That means liquid staking opens up two avenues for you at the same time.
Participating in DeFi only takes 3 simple steps: set up your wallet, buy some crypto, invest in DeFi.
If you already have a wallet, you can skip this step. For those who don’t have a wallet, follow along.
You can go to any trusted crypto wallet site and create an account there. Centralized exchange wallets like Binance require KYC, whereas Decentralize wallets like Metamask don’t require one.
Going with a decentralized wallet is the better option for DeFi.
There are a number of tutorials available on YouTube on how to create a metamask wallet. Use any of them.
Now that you have a wallet, you need to put some crypto in that wallet. The easiest way to do this is by transferring some crypto from your existing account to your wallet address.
For example, if you have your crypto in Binance or Coinbase, you have to put your wallet address, network details, and the amount in your preferable token to transfer the crypto.
There are a lot of ways to participate in DeFi to get good deals. A lot of them are easy, and some of them are fairly complicated.
Some of the more popular DeFi strategies are lending, liquidity mining, yield farming, etc.
But the easiest of them all, and something you’re more likely to profit from is liquid staking. And you can select from the strategies depending on your risk appetite.
Let’s look at all the DeFi opportunities you can get from liquid staking:
Step 1 is to stake your $BNB in Stader to mint the $BNBx in order for you to follow the later steps.
After that go to Wombat and scroll down to the BNB Pool. Go to the BNBx section to deposit and stake your $BNBx.
The Wombat BNBx LP will get you up to 15% in pure yield and a total of up to 32% in staking rewards and yields.
All you need to do now is periodically collect your rewards from Wombat. And if you want to boost your yields even higher, you can lock up $WOM tokens.
Find out a step-by-step guide here👇
Ellipsis is another of Stader’s partner ecosystems where you can use $BNBx to generate rewards.
This is a bit different from the last process, here you stake only half of your total intended capital in Stader.
Stake that half and collect the $BNBx and then go to Ellipsis and find the BNBx:BNB farm.
Now take your BNBx and half of your BNB and stake it on the farm to earn $EPX tokens.
The yield on Ellipsis can go up to 12% and when you add staking rewards it can go as high as 21%.
Find out a step-by-step guide here👇
Step 1 — Borrow any BEP-20 token (preferably stablecoin) from a lending/borrowing protocol against $BNBx
Step 2 — Swap the borrowed asset for more $BNB
Step 3 — Stake these $BNB on Stader to mint more $BNBx
and repeat the same cycle.
Expected yield — 35%+
Every type of investment entails some sort of risk factors, it’s no different in DeFi as well.
These are the three primary risks in DeFi:
Impermanent loss (IL) is a common risk when providing liquidity to AMMs.
1. You provide liquidity in an LP at a given ratio between the assets.
2. Relative price movements move that ratio.
3. The new ratio of assets in the pool has a lower value than the original.
This is the risk that the smart contract will behave in an unexpected way
Most of the time this manifests as a vulnerability in the contract that a hacker can exploit. In 2022 alone, over $2 billion was stolen by hackers in web3.
The best way to make sure that a smart contract is safe is to go through smart contract audits. Stader’s smart contract has been audited by Halborn and Peckshield, two major smart contract auditors in the world.
Price risk arises due to an unexpected price movement against your exposure to an asset.
The movement may be gradual or fast and can be persistent or temporary.
In most cases, only persistent price movements cause a loss to users.
But in certain leveraged strategies even temporary price movements may trigger liquidation and a loss on the collateral.
To mitigate price risk, the best strategy is to use Stop Loss features to prevent losses from being greater than acceptable.
You can read more about the risks involved in DeFi here.
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