How Can These DeFi Projects Pay Such High Daily Interest?
This is a great question.
Here's the answer.
DeFi is an all-encompassing term for financial services made available through the blockchain, the most common being Ethereum.
With Defi, we can all perform the same tasks that we would with a bank - such as earning interest - borrowing - lending - buying assets - trading etc.
But there is no third party involved.
No bank. No middle man.
The benefits are a lower barrier to entry - especially for the third of the world - about 2 billion people - who don't have access to banks.
There are no banks to control things.
This is why centralized finance is becoming antiquated.
So why are DeFi interest yields so high?
A few reasons.
There's a combination of increasing demand - and reduced fees - because there are no middlemen -- means higher reward opportunities for investors.
Think about what the bank does with your money.
They lend it to other people - without your permission - for mortgages - loans - to other people - and then charge these individuals HUGE amounts of interest - for lending out YOUR MONEY!
And then to add insult to injury - they offer you less than 1% a year as a 'thank you'.
This is centralized finance.
However - now we have decentralized.
We become the bank.
In the last few years -- DeFi has opened up new avenues for earning passive income.
Much like a bank will pay interest when users commit their funds to savings - DeFi protocols - such as EMP.money - hold digital assets to grow their liquidity.
And then high-interest payments then become a possibility due to the high demand for DeFi services.
How DeFi works (an overview!)
As DeFi continues to grow - DeFi protocols will offer more and more financial services that (until now) were only offered by conventional 'centralized' banks.
Services such as loans, savings, and insurance.
All these services are created in what are known as smart contracts.
Smart contracts are programs that are executed on a blockchain, which means there is always an immutable 'footprint' of what has been actioned, with no intermediary's or third party involvement - or indeed time loss involved.
And we can get involved by providing liquidity to these DeFi protocols.
Providing liquidity simply means providing financial investment in a DeFi Protocol.
Providing liquidity for DeFi Protocols is similar in context to purchasing conventional stocks and shares in a publicly listed company.
In a conventional 'stock and share' model - we would buy shares with the intention of them increasing in value over time - while at the same time - being paid a dividend.
It's the same with getting involved with DeFi Protocols.
We are providing liquidity for the services that DeFi is bring to the market - and we can earn a handsome daily interest for being a 'liquidity provider'.
With EMP.Money in particular - we are encouraged not to sell our EMP tokens that we earn - as that would be like selling our stock options if we were employed by say a blue chip company.
So we convert our EMP to 'cash' - which is eShares - which we can cash out at any time if we want.
The most exciting thing of all - is that as the DeFi ecosystem matures and adoption grows - many users are becoming aware of the abundance of opportunities - further spurring the growth of the industry.
Perhaps the simplest way to really understand this - is that you can earn passive income by depositing your cryptocurrency in a particular DeFi protocol - allowing you to earn more of the same cryptocurrency as interest.
At its core - the process is similar to a traditional bank - where a user might deposit their traditional funds.
The main difference - is the fewer middlemen who will take their cut of your interest along the way.
You can then accumulate additional income in direct proportion to your existing asset balance. 😀