Decentralized Finance (DeFi) is a financial space that popped out a couple of years ago in the Ethereum blockchain. Now it’s an ecosystem of Decentralized Applications (dApps) and blockchains interacting and bringing together services for everyone who wants to participate.
#DeFi4Bitcoin does not escape from this concept, it just reinforces it by making it happen around bitcoin, in the most secure Bitcoin sidechain, RSK.
Disclaimer: This post contains a mention of the leveraged position BTCX, which was removed from the protocol to simplify the Money On Chain model through its decentralized governance process. To learn more about it, we recommend reading the publication Simplification of the Money On Chain model
Let’s explore the possibilities #DeFi4Bitcoin brings and explain some concepts while we do it.
We’ll take as a ground base that you already have rBTC in an RSK friendly wallet like Defiant (mobile) or Liquality (web3). If you need help with getting rBTC, you can check how to do it in MOC’s wiki.
If you don’t want to be peeping at bitcoin price often because you think it is too volatile for your nature, you can keep your savings, or at least a part of them, in stablecoins. A stablecoin is a token that is pegged 1:1 to a fiat currency like the dollar or euro. It’s stable with respect to the dollar in comparison to bitcoin’s volatility.
To keep your savings in your wallet you just have to mint DoC at the dApp (web app). DoC, Dollar on Chain, is a stablecoin backed 100% with bitcoin. It is backed with bitcoin because Money On Chain uses it as collateral to allow DoC minting. You also can do it through Defiant’s mobile app which operates directly with the protocol. Just to be sure you know what mint is, you can take a look at the difference between minting and buying.
Having a stablecoin in your wallet allows you to make P2P Lending-Borrowing, which enables us to borrow from and lend money to each other directly, without an institutional intermediary like a bank or broker, and of course, there’s no need to have a credit history. Whether you lend money or borrow it, an interest rate will indicate the cost, this is the APR.
APR, Annual Percentage Rate refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors/lenders. This includes any fees or additional costs associated with the transaction, but it does not take compounding into account.
DeFi platforms won’t ask for your credit history, so how do lenders ensure that the borrowers will repay the loan? Because the borrower must deposit an amount of some other coin as collateral. The amount that can be borrowed is related to the amount deposited as collateral.
Collateral, collateral, but, what the heck is collateral? It refers to an asset that a lender accepts as a guarantee for a loan. The collateral acts as a form of protection for the lender.
Well, now you are ready to jump on a platform like Tropykus and lend or borrow DoC, for instance. One common use case is if you want to buy something, but don’t want to sell bitcoin to do it. A known strategy you can use is to deposit bitcoin as collateral to borrow a stablecoin and buy what you want. Once you repay the loan, you will still have your bitcoin, and if you get lucky thanks to a bull run, maybe the loan will pay for itself.
A part of your savings is now in a stablecoin, either to lend money and earn an APR, or to borrow money to buy something, or even to buy more bitcoin. The other part could be in bitcoin or any other coin you want, but as we are bitcoiners, our choice is clear.
As one of the basic principles of a saver or an investor is “never put all the eggs in the same basket”, we have several options to choose from.
Hodl bitcoin is the first option. But if you want to spice things up a little bit, you can allocate a portion of your savings to mint BPro and enjoy the benefits of free leverage, passive income, and the rewards in MoC just for bringing liquidity to Money On Chain protocol.
If you really like pepper, you can go 2x on a leverage position like BTCx. Although this is for people that have more extensive financial knowledge as the risk of losing money is higher. In trading leverage results from using borrowed funds to expand your capital base and the potential returns on that capital base. In other words, you borrow funds so you can invest more, and as a result, earn more. Money On Chain makes it a little simpler for you because the protocol takes care of it, you just sit and contemplate how BTCx moves twice as fast on both, the ups and downs of bitcoin.
Let’s continue exploring what you can do in the amazing world of DeFi.
Besides borrowing/lending platforms which are something familiar to most of us. You can operate on other DeFi platforms that bring more possibilities.
For example, an AMM like RSKSwap. An Automated Market Maker or AMM is a system that provides liquidity to the exchange it operates in through automated trading. On AMM-based decentralized exchanges, the traditional order book is replaced by liquidity pools that are pre-funded on-chain for both assets of the trading pair. The liquidity is provided by other users who also earn passive income on their deposits through trading fees based on the percentage of the liquidity pool that they provide. Talking about AMM we can define another important concept, liquidity pool (LP). It’s a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX). How do we call these trades? Swaps, the exchange of cryptocurrencies in the AMM.
While operating with an AMM you will probably bump into another word you should know, slippage.
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used. It can also occur when a large order is executed but there isn't enough volume at the chosen price to maintain the current bid/ask spread.
To end the journey through #DeFi4Bitcoin we can talk about 2 concepts that appear often when investing in other platforms like Sovryn. One indicator we would see regularly is APY, Annual Percentage Yield, which is the rate you can earn on an account over a year and it includes a compound interest in opposition to APR which doesn’t include compound interest, remember?
Now you’re ready to provide liquidity to an LP to earn a small percentage over every transaction made in this pool. Moreover, while doing it you get LP tokens which represent your share in the pool, and you can use them to do yield farming: this allows you to earn rewards by staking them in the platform. It has drawn analogies to farming because it’s an innovative way to “grow your own cryptocurrency.”
The other concept mentioned here is staking which is the process of locking a crypto asset to earn rewards usually in the same asset. It comes from the PoS (Proof of Stake) consensus mechanism where you stake your asset in order to be a blockchain validator and earn the block reward. In the case of Money On Chain, there is no block to validate but a reward pool that distributes MoC tokens depending on the user's holdings staked, when staking MoC.
Well, we have explored the possibilities #DeFi4Bitcoin brings and several concepts: stablecoin, p2p lending/borrowing, APR, collateral, leverage, AMM, liquidity pool, swap, slippage, APY, and staking.
These are the basic DeFi concepts you must know to understand this ecosystem, but there are more opportunities out there.
It’s a start, but remember always DYOR, Do Your Own Research.