In my previous post on crypto investing, I mentioned how I am currently investing in the decentralized finance (DeFi) space through DeFiChain. Given that I have generated some healthy returns from the platform, I wanted to share more about it so you can also make your crypto assets work a little harder.
For this post, I would be touching a little bit more on what DeFiChain is all about and the ways in which you can profit from it. So before I bore you with more words, let’s get right in.
Disclaimer: Prices of cryptocurrencies are volatile in nature, hence there can be wild swings both upwards and downwards. My investment in DeFiChain, should not be seen as an endorsement of DeFiChain. Investing in DeFi or DeFiChain for that matter remains inherently risky as it is still a rather nascent innovation and relatively unregulated. Hence, always do your own research and invest accordingly to your own risk appetite. Lastly, I take no responsibility for future losses or gains from your investment in DeFiChain. I also do not have any links to Cake Defi or DeFiChain.
What is DeFiChain?
At its core, DeFiChain is a blockchain network that is a branch of the main Bitcoin network. So think of it as a Layer 2 blockchain expansion upon the main Bitcoin network. Or if you are a Marvel fan, DeFiChain is simply part of a Bitcoin ‘multiverse’.
Despite being built on top of the Bitcoin network, DeFiChain mainly uses a proof-of-stake (POS) mechanism for its own network. However, it still anchors itself to a validator node in the Bitcoin network. Thus, DeFiChain somewhat has the best of both worlds, some flexibility with its own network and added security due to Bitcoin’s proof-of-work algorithm.
DeFiChain’s purpose and vision
Looking at DeFiChain’s whitepaper, the developers’ vision for DeFiChain is for it to be used purely as a DeFi platform that handles financial services and transactions such as lending, asset tokenization and dividend distribution.
To fulfil this vision, DeFiChain was developed as a non-Turing-complete blockchain network. This means that its coding script can only be used for specific purposes and cannot be easily modified or altered for other purposes.
This streamlined specificity and focus of DeFiChain also reduce the probability of human error in coding. Lesser probability of human error also means fewer vulnerabilities or bugs on the DeFiChain network. This in turn leads to a more stable and secured blockchain network as a whole.
In its current phase, DeFiChain already offers services such as liquidity mining, lending and staking through either its native DeFi Wallet app or Cake DeFi. Synthetic stocks, atomic swap and loans/collateralization are next on the roadmap of features for the DeFiChain network. I for one is definitely looking forward to these features being implemented.
Investing on DeFiChain
Having briefing covered what DeFiChain is about, it is time to get into the juicy part, generating dividends from it. Personally, I only do two things on the DeFiChain network, liquidity mining and staking.
While the term liquidity mining might seem a little daunting, it basically refers to the provision of liquidity to a decentralized exchange (DEX). In liquidity mining, two cryptocurrencies are placed into a liquidity pool so as to facilitate their transactions on the DEX.
For DeFiChain. there are currently a total of seven liquidity pools.
By putting the respective cryptocurrencies into either of the seven pools, liquidity miners would then earn a portion of the fees involved when transactions take place on the DeFiChain network involving both crypto-assets. The portion of fees earned is directly proportional to the amount added into the pool.
For example, if I provide a value of 1 Bitcoin to a liquidity pool value of 9 Bitcoin, I would be entitled to 10% of the fees for every transaction. Thus, as long as trading volume is healthy on the DEX, liquidity miners would almost always earn in the long run.
With that said, if you are thinking of getting into liquidity mining, do be mindful of impermanent loss.
What is impermanent loss?
As the term might suggest, impermanent loss is a loss that is…well not permanent😁. Think of it as somewhat of a paper loss.
As a whole, liquidity pools involve two sets of cryptocurrencies in a pre-determined ratio. Assuming a liquidity pool with a 1:1 ratio, you would thus need to contribute two cryptocurrencies in a 50-50 split.
For example, let’s say 1 Bitcoin is equivalent to 20,000 DFI, and you want to contribute to a 1:1 BTC-DFI liquidity pool, you would need both 1 BTC and 20,000 DFI, which is 2 BTC in value. Assuming that the liquidity pool now becomes 10 BTC and 200,000 DFI due to your contribution, you would thus be entitled to a 10% share of the liquidity pool.
That’s easy to understand right? Now let’s make it a little more tricky.
Let’s assume that Bitcoin price rises in the future and instead of 20000 DFI, 1 Bitcoin is now instead equivalent to 25000 DFI. So based on the previous liquidity pool of 10 BTC and 200,000 DFI, the ratio of 1:1 is not maintained as 10 BTC would be equivalent to 250,000 DFI instead. Thus, with the influence of arbitrage traders, the liquidity pool would instead become 9 BTC and 225,000 DFI.
Remember your earlier entitled 10% share of the liquidity pool? If you were to withdraw it now, you would receive 0.9 BTC and 22,500 DFI or 1.8 BTC in total. Thus, you would have suffered a loss contributing to the liquidity pool instead of simply holding the cryptocurrencies.
So you might be thinking…why is it still profitable to liquidity mine? The main answer to that is due to the fees you stand to gain from transactions. Over the long run, the fees you gain would cover whatever impermanent loss there might be.
Besides liquidity mining, staking is another lucrative activity that you can do on DeFiChain.
Fundamentally, staking is the provision of cryptocurrency to a blockchain network to both validate transactions and ‘mine’ on the network. By participating in staking, individuals gain a small fee in the form of the network’s native cryptocurrency whenever they successfully validate a transaction or mint a new block to the network.
Instead of depending on computing power in traditional proof-of-work mining, staking depends on the amount of cryptocurrency put into the network. Thus if you stake a higher amount, your chance of validating transactions or minting a new block would increase.
For DeFiChain itself, you can participate in staking either through Cake Defi or by setting up a master node (which requires a fee of 20k DFI).
Setting it all up
Now that you roughly know what liquidity mining and staking is, I would run through how both can be set up on the DeFiChain network. Personally, I make use of both the DeFiChain wallet and Cake Defi. Liquidity mining is done on the DeFiChain wallet, while staking is done through Cake Defi.
Before proceeding any further, I do need to emphasize that Cake Defi is a 3rd party trusted affiliate of the DeFiChain network. Hence, there is some risk as they are a private company and their financial statements are not publicly shared.
Nevertheless, Cake Defi has been granted an exemption by MAS to provide digital payment token services in Singapore, pending the review outcome of its license under the Payment Services Act. In terms of the review status, MAS is currently already in the final review stage, thus there should be an outcome really soon.
Step 1: Installation and signing up
(Cake Defi Referral link: You can input my referral code 824194 or click here to sign up via my referral link. You would gain $30 worth of DFI (which can only be withdrawn after 6 months), after depositing $50 worth of cryptocurrency into Cake Defi. I on the other hand would earn $10 worth of DFI per successful referral).
Step 2: Depositing cryptocurrencies
After successfully installing the DeFiChain wallet and signing up an account with Cake Defi, the next step is to deposit cryptocurrencies into the platforms.
This can be done via Cake Defi only or by using both the DefiChain wallet and Cake Defi. I will first go through the easier method which is using Cake Defi only.
Through Cake Defi only
Click on all assets at the bottom right of the page after signing in.
After clicking, you can see all the cryptocurrencies that you can deposit into Cake Defi. Currently, Cake Defi supports a total of nine cryptocurrencies.
From here, just choose which cryptocurrency you want to deposit into Cake Defi and input the wallet address of your Cake Defi wallet into the external wallet where your cryptocurrency is being stored in.
Remember to use your native cryptocurrency network for the deposit into Cake Defi! (eg. Bitcoin via Bitcoin network).
Once the transfer is done, it will take some time for the transferred amount to appear in Cake Defi. You would also receive an email when the deposit is completed successfully.
Using both Cake Defi and DefiChain Wallet
If you want to transfer your cryptocurrencies over to the DefiChain Wallet, there are a few additional steps to take in addition to the above.
After transferring your cryptocurrency into Cake Defi, open up the installed DefiChain wallet program on your desktop.
You would see something similar to the image below.
The synchronisation has to reach 100% before you can create a new wallet. For it to synchronise faster, you can click on the info or ‘i’ icon and select a snapshot as seen below.
Basically, this starts the synchronisation process from the latest block backup on the DeFiChain network.
Once synchronisation is complete, you can then create a wallet on the main page of the wallet and create a password for your personal wallet.
Do not forget this password else you might have difficulties accessing your wallet in the future!
After creating your wallet you would then be at the main balance page of the wallet.
From here, just click on the DFI window and click on Receive > New Address.
Thereafter, create an appropriate name for the wallet and then click on create. If done correctly, you would then see your wallet address in the receive section.
With this address, you can then transfer your cryptocurrencies from Cake Defi to the DeFiChain wallet.
To perform the transfer from Cake Defi, click on withdraw under the cryptocurrency and choose DeFiChain network.
Always remember to use the DeFiChain network when transferring from Cake Defi to the DeFiChain wallet!
After going through all the safety checks, input the wallet address of your DeFiChain wallet.
The two-factor authentication code can be taken from the authenticator app which was used when signing up on Cake Defi.
If done correctly, you would see your transferred cryptocurrency in your DeFiChain wallet balance after a while as the transfer is not instantaneous.
While the transfer to the DeFiChain wallet might seem a little troublesome, there are benefits to it, namely the removal of Cake DeFi’s share of your returns. I will be touching on this next.
Step 3: Liquidity mining and staking
For liquidity mining or staking, you can once again choose to do it either on Cake Defi, the DeFiChain wallet or both.
As mentioned earlier in the post, I do my liquidity mining on the DeFiChain wallet while staking is done via Cake Defi. My main reason for doing liquidity mining sorely on the DeFiChain wallet is to remove any potential fees involved.
While Cake Defi does not charge an upfront fee for liquidity mining or staking, they take a small cut out of all generated returns. Hence, if possible, I would definitely recommend doing it on the DeFiChain wallet instead.
Via DeFiChain wallet
It is actually really easy to do liquidity mining on the DeFiChain wallet.
After transferring your cryptocurrency from Cake Defi, just click on Liquidity Mining in the wallet, followed by Add Liquidity at the top right. You can also look at the videos to better understand how liquidity mining works.
After that, you need to input the relevant cryptocurrencies.
Currently, liquidity pools on DefiChain are configured in a 1:1 ratio. Thus, you would need an equivalent value of both cryptocurrencies to perform liquidity mining.
After inputting the necessary cryptocurrencies, you would then see the liquidity pool and your respective share in it.
With that, you would have successfully completed setting up liquidity mining in the DeFiChain wallet. Now you can just sit back and let the liquidity fees roll in.
When it comes to staking on the DeFiChain wallet, you can only do it with a masternode. Do note that the masternode has to be online (aka your machine has to be on) for you to receive any rewards.
Given that I am not willing to pay the fee of 20,000 DFI to set up a masternode, I thus do it via Cake Defi instead.
Through Cake Defi
As compared to the DeFiChain wallet, liquidity mining and staking on Cake Defi is much easier. A few clicks are all it takes to set it up.
Simply click on products at the top and choose either liquidity mining or staking.
Once you clicked on liquidity mining, you can then choose which liquidity pool to contribute to.
The convenient thing about Cake Defi is that it automatically splits your cryptocurrency amount by 50% when adding liquidity. For example, if I contribute 1 Bitcoin, it will be split into 0.5 BTC and the equivalent amount of DFI.
After clicking add, your amount will be added into the liquidity pool. With that, the liquidity mining process is then successfully completed.
To perform staking on Cake Defi, simply click on staking under the product list.
Thereafter, you can then stake available DFI in your wallet into the DFI staking pool.
Click on stake and you are done!
For Cake Defi, liquidity mining and staking returns are consolidated and distributed out twice per day. On the DeFiChain wallet, you get the liquidity fees instantly whenever a transaction involves the liquidity pool.
Step 4: Compounding the returns
After successfully setting up your liquidity mining and staking, the final optional step is that you can compound your returns. I would really recommend doing this since it is free and it can really extrapolate your returns.
On Cake Defi, you can compound your returns by simply enabling auto-stake and auto-compound in the liquidity mining and staking page respectively.
On the DeFiChain wallet, compounding is slightly more troublesome and manual. In order to compound your returns, you would need to either withdraw your earned DFI to Cake Defi and stake it, or manually contribute to the liquidity pool in the DeFiChain wallet.
To withdraw your DFI from the wallet to Cake Defi, you would need the DFI wallet address on Cake Defi. You can get this by clicking on the deposit option under All Assets in Cake Defi.
You can then paste this wallet address into the DeFiChain wallet under the send option.
For DFI, you would need to keep a minimum of 1 UTXO DFI in the wallet. This is to cater for any incurred transfer fee.
Once transferred, you can then proceed to stake your DFI on Cake Defi.
All in all, while it might seem a little troublesome and complicated using the DeFiChain wallet, it is really easy once you used it for a bit. If you are investing in DeFiChain for the long term, I would really recommend using it. After all, we all want to get the maximum possible returns right?
Cashing out your profits
At the current stage where cryptocurrencies are, I would recommend cashing out some profits when there is a big run-up in price, no matter the cryptocurrency you are investing in.
To cash out your profits on the DeFiChain network, you would mostly have to go through Cake Defi. It is only the conversion of cryptocurrency to fiat (normal currency) where there are a plethora of options. For me, I use Binance to convert my cryptocurrencies to SGD.
To cash out DFI from Cake DEFI, you can either use a cryptocurrency exchange that offers DFI currency pairings or convert your DFI to another cryptocurrency and cash it out from Cake Defi. If you are using the latter option, do note that Cake Defi does not offer onboard cryptocurrency swaps. Hence, you would have to convert your DFI using the DefiChain wallet.
In the DeFiChain wallet, DFI can be converted to any of the seven currently supported cryptocurrency tokens.
Once converted, you can then send the cryptocurrency token back to Cake Defi. Normally, I would convert my DFI to USDT tokens so that the value would not fluctuate that much.
After transferring your cryptocurrency token back to Cake Defi, you can then transfer that cryptocurrency via their native network to any exchange and cash it out from there.
The reason for transferring your tokens from the DeFiChain wallet to Cake Defi is for the tokens to be ‘unwrapped’. If you look at the tokens on offer in the DeFiChain wallet, you would notice they are labelled with a letter d, for example, dETH, dBTC etc.
This means that such tokens can only be transacted over the DeFiChain network. Thus, for these tokens to be transacted over their native network, they would have to be unwrapped.
To my knowledge, Cake Defi is currently the only platform that has a built-in DeFiChain unwrapping function.
While earning dividends on DeFiChain is all well and good, I feel that investors should be fully aware of the risks too. In my opinion, these risks can be categorized mainly as volatility risk, regulatory risk and third party risk.
Currently, volatility and cryptocurrencies kind of go hand-in-hand.
Looking at the charts, we can see wild swings in the price of Bitcoin for this year alone.
While the price of Bitcoin is recovering, it may also dip in the next month or two months down the road. The fact is that no one really knows where the price of Bitcoin might go.
The same theory could also be applied to DFI.
If you were to compare the peaks and troughs of Bitcoin and DFI, you would notice that DFI is more susceptible to wide price swings. This is not really surprising since DFI is an altcoin and has a market cap significantly lesser than Bitcoin.
Hence, if you do partake in liquidity mining and staking on DeFiChain, do be mindful that you are exposing yourself to more volatility than merely putting your money in large-cap cryptocurrencies.
Being a Defi project, there are definitely questions to be asked about the long-term viability of DeFiChain. For now, DeFiChain is doing pretty well due to the resurgence in Bitcoin price and general hype and interest around Defi.
To be clear, I am not saying that DeFiChain is not pushing out important features and fixes on its network, which as a matter of fact it is. Rather, it is just that Defi has attracted a lot of attention and everyone is jumping on the hype train.
Whether this would continue in the long run remains to be seen.
Furthermore, as more money continues to flow into decentralized finance, I expect more attention from governments and central banks. While I personally feel that regulation is good for cryptocurrencies in general, as it better allows mainstream acceptance, there is no real gauge of how receptive traditional financial institutions would be towards decentralized finance as a whole. Both are after all going for a share of the same pie.
Thus, for any Defi investor out there, be mentally prepared that your invested project could fail in the long run. This is applicable to DeFiChain too.
While I am cautiously optimistic about DeFiChain’s roadmap, I am also equally aware that my investment in DeFiChain could go bust. Hence, I would only invest with money that I do not mind losing in the long run.
Third party risk
Besides just risks regarding cryptocurrency investing and DeFiChain, there is also an intermediary risk with regards to Cake Defi.
Throughout my post, you would see that Cake Defi plays a central role in how you can invest in DeFiChain.
Currently, Cake Defi remains a private company with no publicly available financial statements. While they do share a quarterly transparency report, the latest being Q2 2021, these are not audited and the numbers could thus be fabricated. Nevertheless, they are looking to bring in auditors for Q3 2021.
Now, I am not saying that Cake Defi fabricates their announced financial figures but rather it is a possibility. Taking into account that there are cases of publicly listed companies with appointed auditors cooking their books, what more of a private company currently with no regulatory oversight?
In addition, Cake Defi also holds 7350 out of 8635 master nodes on the DeFiChain network. Hence, it could be said that DeFiChain has yet to reach full decentralization.
Personally, I am still 50-50 on the authenticity of Cake Defi. For all the good points that Cake Defi offers such as transparency reports, improving user experience on the DeFiChain network and handling withdrawals and deposits, there are a few questionable aspects such as its CEO’s past history, its media marketing content and method and finally the sustainability of its revenue model.
I won’t be going into each individual aspect as that could garner a whole new article itself. Rather, I feel that investors should look into these aspects themselves and decide if they still want to invest in Cake Defi and the DeFiChain network. Currently, they are rather synonymous in nature.
So there you have it, I think I have put up quite a comprehensive post about how you can invest in the DeFiChain network.
By investing in DeFiChain, you are also putting the cryptocurrencies you hold to better use. With the current recovery of the crypto markets, expect some healthy returns in the short term. You can bet that I will be continuing my investment in DeFiChain.
Will DeFiChain remain relevant in the long term? I think that is still too early to tell. I for one would definitely keep up to date on the upcoming implementations and features on the DeFiChain network. That will hopefully paint a clearer picture for DeFiChain’s long term utility.
As with all cryptocurrency investments, do not allocate a large portion of your portfolio to it. Rather, only invest with money you can afford to lose.
And as always, stay disciplined and invest rationally. My next post should be something more mainstream…stay tuned for it.