The Game Changer: Decentralized Finance (DeFi)
Traditional financial instruments are infamous for their meager returns. Savings accounts and Certificates of Deposit (CDs), according to financial aggregators like NerdWallet, often barely yield close to a 4% Annual Percentage Yield (APY).
However, new-age solutions like Decentralized Finance (DeFi) offer dramatically higher returns, averaging 60%-80% APY, with documented cases exceeding a 100% return (essentially doubling your money).
The DeFi market is projected to swell to $450 billion by 2030, a forecast many analysts deem highly conservative given that the global bond market alone surpasses one hundred trillion dollars.
DeFi is shorthand for “Decentralized Finance.” While finance is the practice of using capital to generate more capital through activities like lending or investing, traditional finance is heavily dependent on centralized institutions, such as banks. DeFi’s goal is to conduct these financial activities with minimal, or no, reliance on banks.
To grasp DeFi fully, one must understand tokens and protocols. This is thoroughly explored in the subtitle “How Does This DeFi Phenomenon Function? Where Do the Returns Originate?” Feel free to jump ahead, or first read about the main drivers of DeFi adoption and why caution is still necessary.
If your primary focus is on how to make money, skip to “Tools for Amplifying Your Profitability.” There, you’ll find foundational concepts, and you can provide your email to receive notifications about new posts in this series. If you’re keen on the specific software we are developing to aid your profitability, head directly to the sixth subtitle.
Much of the material in this post draws inspiration from Alexandra Damsker’s book, Understanding Defi, which comes highly recommended.
Ultimately, as you’ve likely gathered, DeFi is an investment—just like launching a business or purchasing a CD. This means you must exercise prudence with your capital and maintain constant vigilance.
Why Seek Alternatives to Traditional Banks?
A significant catalyst for DeFi’s rapid growth is the widespread disenchantment with banking institutions. The core grievance is that banks exploit our money for massive profits without sharing a fair percentage of those gains.
Another driving factor is the disparate legal treatment of banks versus ordinary citizens. If a regular individual defaults on a mortgage, they lose their home. Conversely, we have observed on multiple occasions that when banks engage in irresponsible use of client funds, governments often intervene to bail them out, frequently using taxpayer money.
A prime example is the 2008 banking crisis, where the irresponsible actions of financial institutions triggered a global economic collapse. This necessitated a $700 billion Emergency Economic Stimulus Plan in 2008 (the “bank bailout,” later extended to companies like General Motors and Chrysler) and another $780 billion stimulus package in 2009. Risky and poor lending practices harmed everyone except the banks themselves.
More recently, the collapse of Silicon Valley Bank (SVB) highlighted not only operational failures—of a bank holding savings accounts for tech entrepreneurs, often exceeding the $250,000 insured limit—but also political maneuvering. Greg Becker, the former SVB CEO, led a powerful lobbying effort to exempt SVB from the regulatory “burdens” of Dodd-Frank, arguing that stress tests were unnecessary expenses. He ultimately sold his stock weeks before the bank’s failure, yet personally assured clients the day before the collapse that their funds were secure.
Do Scams Still Occur in DeFi?
Regrettably, this is true, which is why the alchemy145 team is launching this series to discuss DeFi topics, our investments, the software we’ll develop to assist you, and our perspectives. While average returns are quite high, this doesn’t negate the necessity for extreme caution.
Some infamous incidents were not outright scams but rather instances of poor design, such as Anchor, an investment protocol that merely stored tokens without a clear mechanism for generating value from them.
Another celebrated case was Voyager, where a rapid drop in token prices, triggered by Federal Reserve rate hikes, created a liquidity crisis for hedge funds and crypto platforms overly exposed to digital assets. Many firms defaulted on loans, causing a ripple effect that hit lenders like Voyager.
You must also be diligent about where you store your tokens and the exchange you use. FTX, a venture capital-backed exchange, notoriously misappropriated customer funds to finance billions in bets by Alameda, an affiliated private fund—nearly 70% of Alameda’s loans were covered by FTX customer funds. When this became public, a massive withdrawal rush ensued. Since FTX had misspent the funds, the company filed for bankruptcy, leaving millions of users wondering how to recover their assets.
The FTX situation provides several vital lessons: 1) Caution is paramount, even when a DeFi project is backed by major institutions like Sequoia (an early investor in DoorDash and AirBnb). 2) Prudence must still apply, even if the founder has been featured on the cover of Forbes.
How Does This DeFi Phenomenon Function? Where Do the Returns Originate?
We have been using bold formatting to highlight critical phrases, but we will pause that practice here. We believe this section requires a full, uninterrupted read for complete understanding.
To understand DeFi, one must grasp protocols. These are digital financial instruments: you entrust money to others, who are expected to return it with interest. In DeFi, this is governed by protocols—programmable rules that automatically execute the transfer of funds when conditions are met.
These protocols primarily utilize programmable money known as tokens. Once the rules are fulfilled, money is transferred to the borrower, and the protocol dictates when those tokens return to the lender.
In DeFi’s current state, loans often do not go to enterprises generating real revenue or value; they tend to be extremely short-term, lasting minutes to a few weeks. The key is discerning where to commit your tokens. If the value-generation mechanism of a protocol is unclear, it is unlikely to succeed.
Protocol Type #1: Staking
You deposit a token onto a platform account, where it is used to support validator accounts or nodes on a blockchain. Your return is based on the APY (Annual Percentage Yield).
To understand validation, recall that traditional finance uses centralized accounting ledgers. In decentralized finance, transaction history is distributed and stored across multiple tokens, including yours. This prevents falsification because the record is verified against thousands of others.
When the validator node linked to your tokens is selected to validate a transaction and receives a reward, your tokens are also rewarded, and the payment for the additional tokens is credited directly to your account.
Protocol Type #2: Lending Protocols
Here, you fulfill the most basic financial function: lending your money to be returned with interest. This differs from staking in that the return is earned by lending to an anonymous borrower (matched by the protocol), not by supporting the chain.
We subdivide this category for better explanation:
2.1. Liquidity Provision on a Swap or Decentralized Exchange (DEX)
A swap exchange is a DEX that acts as an Automated Market Maker (AMM), an exchange running on an algorithmic matching system rather than brokers. A market maker, like Nasdaq, facilitates transactions between buyers and sellers.
This represents a foundational financial innovation in blockchain. Traditionally, to swap one token for another, you’d use a centralized exchange that needs to amass inventory (tokens) and charge a fee.
Uniswap, the first DEX, revolutionized this. Its creators realized: “We want this service, but we don’t want to raise money, buy tokens, or run the operation.” They saw many wallets holding tokens that were sitting idle and earning nothing. Their ingenious solution: “Send us your tokens; we’ll lend them out to other users, and you’ll earn interest.”
The average return for a liquidity provider is typically 1%-6% APY, which is considerably better than the 0% earned by simply holding tokens in a wallet.
2.2. Borrower-Lender Platforms
These platforms are more akin to traditional financial tools: one party supplies assets to the protocol, and another borrows them. The parties remain anonymous. Borrowers do not require a credit score; instead, they must provide collateral.
If the collateral’s value drops, a condition is usually triggered for its automatic liquidation (sale) when it falls to around 100%-115% of the outstanding loan value (percentages vary by protocol).
Why would someone borrow tokens if they must put up token collateral? Usually, they are speculating that another currency will significantly appreciate in value, allowing them to profit after repaying the principal and interest, while still reclaiming their original token collateral.
Average returns range from 2% to 10% APY. Be wary of protocols offering outlandish returns; most have failed. Always ensure you fully understand the legitimate source of your return.
2.3. Yield Farming
Average returns for this method are 60%-80%, and they have been known to be much higher. Yield farming, or liquidity mining, is a strategy for maximizing returns from various lending protocols. It involves researching or using an automated aggregator to implement multiple strategies to increase gains.
You continually move your assets from one interest-bearing protocol to another. Since interest rates can change daily or more frequently, this requires constant management. You must also account for gas fees, as every transaction incurs a small cost.
An alternative is using an automated aggregator tool, which conducts the search and moves your assets for you.
🚀 I Want to Start with a Small Investment. Where Can I Find Protocols and How Do I Invest?
If you want to receive our analysis, guidance on finding protocols, and instructions on how to invest, find the link to our original post at the bottom of this article. We will notify you as soon as this content is ready.
This is the inaugural post, a guest contribution from the alchemy145 team, on DeFi. We plan to write more posts to make your DeFi experience safer.
Producing quality content takes time: multiple teams review our work, we gather evidence, and we experience the processes firsthand. The result, however, is exceptional. We have discovered fantastic ideas for generating substantial profits, such as savings accounts that outperform those in the United States, clear figures on average DeFi returns, and tools to simplify your journey.
🛠️ Tools for Amplifying Your Profitability
The alchemy145 blog is part of the alchemy145 software development team, and we aim for our community to receive news about our tools as soon as possible.
You can enter your email in any of the forms for the tool you are interested in. We will provide updates and release dates for the first versions of these tools.
Tool #1: Automated Money Movers (Optimized APY Storage)
Transferring money is often expensive and unnecessarily complicated. This prevents millions of people globally from capitalizing on banks and DeFi platforms that offer high APYs simply for holding money in savings accounts that allow flexible withdrawals.
The interest rates offered by foreign banks or DeFi protocols fluctuate over time, making it tedious to constantly move funds to secure the best rate, all while researching the safety of each platform.
Automated money movers solve this problem. If you’re interested in learning more about this tool, find the link to our original post at the bottom and we will send you news and future release dates.
Tool #2: Capital Lending for Diverse Business Activities
A large volume of capital in DeFi is currently used in trading operations, where gains stem from asset appreciation.
While this is fine, there are vast untapped opportunities to use these billions of dollars to finance many other types of business ventures. E-commerce stores are a great example. Initially, every store is a theory—a hypothesis that a specific product category and distribution channel (ads, influencer marketing, etc.) can generate sales.
Once validated, a store becomes a revenue-generating engine: given an amount of money, it will return a higher amount. For the store owner, using loans for these operations is highly logical, as it frees up their own capital for other business experiments.
Crucially, this influx of capital is the difference between a store selling a few items and one that comes to dominate a market niche and build a strong brand. Therefore, the speed at which additional capital can be secured is vital.
For the capital owner, this means putting money to work, experiencing the excitement of sales notifications, discovering business opportunities, and participating in pitches—all without needing to know the granular details of the associated effort. This experience can be fully automated if preferred.
Send us your email via the corresponding form (in the link at the bottom of the original post) and we will send you news and release dates for the first versions of this project as soon as they are available.
