Here's How You Can Tap into DeFi to Maximise Profitability
Grow Your Business, Not Your Inbox
When undertaking an entrepreneurial venture, one needs to manage both the product or service delivery to customers, and the business’s assets, from people, to IP, to profits. Most entrepreneurs don’t take long to hire a human resource director but tend to pay less attention to profit management. But managing revenue and profit intelligently can be a great way to find extra resources for R&D or marketing, thereby increasing your chances of success.
Although decentralized finance, or "DeFi," has been primarily confined to fringe crypto enthusiasts, the sector offers the potential for entrepreneurs to maximise returns on otherwise idle capital in an extremely flexible way.
DeFi describes an evolving ecosystem of applications powered by decentralized ledgers or blockchains. The most famous example of a blockchain is, of course, Bitcoin. However, Bitcoin in its current form has some limitations. While touted as a store of value and hedge against macro risk, the network doesn’t have much utility beyond preserving and transferring wealth, and its volatility makes it a little risky for short term treasury management.
That’s where more complex networks, such as Ethereum, come into play. Ethereum works much like Bitcoin at its core but benefits from smart contracts — programmable contracts that allow predefined actions to execute autonomously. These novel algorithmic contracts disintermediate third parties, allowing for decentralized peer-to-peer transactions. They’re also the key to creating decentralized applications, or Dapps, that form the basis of DeFi.
There are many types of dApps in existence, ranging from games and social media to lending platforms and exchanges. But it should come as no surprise that financial applications are an increasingly popular arena for this technology. This new breed of services offers much of the same functionality as traditional financial offerings but with lower overhead, fewer permissions, a higher degree of privacy, and mitigating many of the risks present in conventional finance.
One particular niche offered by DeFi — but perhaps the most interesting for entrepreneurs — is how they can effortlessly make a profit simply by leveraging idle capital. By lending the assets you own into DeFi protocols, you can earn far more interest than the banks are currently offering, allowing you to grow your capital in a relatively safe way. Although there are risks, the most established DeFi protocols have an excellent track record when it comes to managing both the security and financial risks. But on the whole, it's a relatively safe means of generating outsized returns. Outsized because, as no traditional lender has yet dared dip their toes into crypto, the demand for capital exceeds the amounts currently being lent out.
This is exactly how most savings accounts work at a bank. Beyond a safe place to store capital, users who deposit funds are actually lending assets to the bank with the agreement that the bank will return equivalent assets in the future at a time of the customer’s choosing. Banks then use those deposits to lend out to other people or businesses and pay out a small amount of interest as an incentive for customer deposits. The whole system works to improve overall liquidity for the institution.
In DeFi, however, no institution or employees are involved in the lending and borrowing process as it’s all enacted via automated smart contracts. So while fees are still collected on transactions and used as an incentive for lenders, there’s no intermediary to take a cut. This means that unlike most banks, which offer between 0.01 to 1 percent annual returns on deposits, many DeFi platforms can offer as much as 10 percent Annual Percentage Rate (APR) or higher.
However, there are a few tradeoffs. For one, the crypto space can be complicated, and the current DeFi landscape hasn’t made things any easier. Knowing what platforms to use and how to use them can be tricky, and both scams and technical issues can quickly create risks. It can take time and patience for many to feel comfortable enough to get involved.
Fortunately, an increasing number of providers handle much of the technicalities for users, allowing them to simply provide their assets and let the platform do the rest. There are several offerings, such as OSOM’s new DeFi Earn service, that allows the user to set up their account, deposit their funds with a simple bank transfer and immediately begin earning through some of the most reliable DeFi and CeFi stablecoin lending pools. Code in the background manages user funds across DeFi platforms and earns yield more consistently and in a safer way than if they did it themselves, because it is optimized daily, which is something most people would not do. The advantage of an aggregator is that what would typically take eight transactions to initiate an investment, can be done in one in one click. Additionally, all the necessary due diligence on DeFi projects and stablecoins has already been done for you.
All business ventures aim to maximize profitability. But now entrepreneurs can fast-track their profitability significantly by leveraging DeFi capabilities, provided they plan their activities carefully. In any event, savvy investors who want to put their assets to work now have more options to do so, even with modest starting capital.
Editor's note: The author is co-Founder and CEO of Polybius, the makers of OSOM, which was referenced in this article.