Have you ever heard the term "DeFi" thrown around in conversations about cryptocurrencies and blockchain technology? If you've felt a little lost or confused by this new buzzword, you're not alone!

In this blog post, we'll demystify DeFi and explain why it's becoming increasingly popular in the world of next-gen finance.

DeFi, short for Decentralised Finance, is a movement that aims to revolutionise the traditional financial system by leveraging the power of blockchain technology. DeFi allows people to access financial products like lending, borrowing, and trading without the need for intermediaries such as banks or financial institutions.

At its core, DeFi is built on smart contracts – self-executing agreements that run on blockchain networks like Ethereum. These smart contracts enable the creation of decentralised applications (dApps) that provide a wide range of financial services, such as decentralised exchanges (DEXs), lending platforms, and stablecoins (cryptocurrencies with a value pegged to a stable asset like the US dollar).

So why is DeFi gaining traction? There are a number of reasons:

**Accessibility:** DeFi platforms are open to anyone with an internet connection, which means that people in developing countries or those with limited access to traditional banking can now participate in the global financial system.

**Transparency:** With all transactions recorded on a public blockchain, users can easily audit the platform's operations and ensure their funds are being handled responsibly.

**Control:** DeFi users maintain full control over their assets and can interact directly with smart contracts, eliminating the need for middlemen and reducing fees.

**Customisation:** Users can create their own financial products or services by combining various DeFi building blocks, opening the door for innovative solutions that cater to individual needs.

In short, DeFi is transforming the way we interact with financial services by offering a decentralised, transparent, and inclusive alternative to the traditional system.

As the technology continues to develop and mature, we can expect to see even more exciting innovations in the world of decentralised finance, we’re looking at you NFTs!

Are you ready to [Access DeFi](https://blockearner.com.au/products/defi-access/)?

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DeFi allows people to access financial products like lending, borrowing, and trading without the need for intermediaries such as banks or financial institutions.

What is DeFi?

# What is AAVE?

Aave is a way for users to be connected to a worldwide network of lenders and borrowers in the cryptocurrency field. It’s all automated and works on a non-custodial basis, meaning you are in total control of your own wallet and where you choose to direct your cryptocurrency digital assets. 

The group take their name from the Finnish word for ‘phantom’ or ‘something unseen’. Rather than relying on traditional banking systems and brick and mortar (or maybe marble and gold) buildings, the Aave protocol is fully automated allowing individual lenders and borrowers to connect with ghost-like efficiency via the liquidity pool. As of December 2021, the total value of this pool has the cash equivalent of more than $27 billion. 

The protocol is built on the premise of lending and borrowing digital assets with in-built safety nets. This is done by employing smart contracts that automatically facilitate loan activity as well as innovative concepts such as **collateral liquidations** and **staker slashing**. Ultimately, this simply means it is very difficult to default on your payments.

In other words, join the global pool of lenders and borrowers, follow the rates as they change and watch your percent yield grow!

***Working Example***

Let’s say you want to use Block Earner to borrow or lend USDC, the digital stablecoin pegged to the United States dollar. When this transaction is opened, you receive a **tokenised** version of that loan in return. This takes the form of aUSDC, aka AAVE USDC.

When buying 1000 USDC worth of aUSDC, this is equivalent to 1000 aUSDC. The rate stays at exactly 8% all year. The final standings would be at 1080 aUSDC, which can be sold back for 1,080 USDC and then finally back to AUD. 

Anyone holding aUSDC will find their balance constantly increasing proportional with the yield rates at the time. For Block Earner users, this is updated daily. Notably, this value is guaranteed to never go negative, meaning your USDC value will never go down.

The exact details of this workflow are all handled by Block Earner’s backend, leaving the technical challenges out of your hands. All you need to do is choose your assets and let the code handle the dirty work!

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Aave is a way for users to be connected to a worldwide network of lenders and borrowers in the cryptocurrency field...

What is AAVE?

# What is Compound?

Compound is another DeFi borrowing innovation, which actually predates its trendier more happening cousin Aave. Identifying the flaws in traditional avenues of loans, Compound aimed to bridge the gap between traditional understanding of interest rates in borrowing and lending and the burgeoning world of cryptocurrency. 

By implementing an automated, decentralised protocol, Compound is designed “for the frictionless borrowing of **Ethereum tokens** without the flaws of existing approaches, enabling proper money markets to function, and creating a safe positive-yield approach to storing assets”.

As of December 2021, Compound has a total lending pool exceeding $19 billion with a wide variety of tokens and assets available for trading. The open-source nature of the Compound protocol also ensures fair and balanced borrowing and lending to happen on-chain. 

DeFi lending and borrowing is still in its relative infancy, so there has never been a better time to join this innovative field!

***Working Example***

Let’s say you want to use Block Earner to borrow or lend USDC (USD Coin - a digital stablecoin is pegged to the United States dollar). When this transaction is opened, you receive a tokenised version of that loan in return. This takes the form of cUSDC, aka Compound USDC.

When buying 1000 USDC worth of cUSDC, this could be around 50,000 cUSDC at time of purchase. The rate stays fixed at 8% all year. The cUSDC is finally worth 1,080 USDC which can be sold back to AUD. If you want to hold cUSDC, the value of the cUSDC will only increase, allowing you to buy back even more USDC. 

For Block Earner users, this is updated daily. Notably, this value is guaranteed to never go negative, meaning your USDC value will never go down.

The exact details of this workflow are all handled by Block Earner’s backend, leaving the technical challenges out of your hands. All you need to do is choose your assets and let the code handle the dirty work!


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Compound is another DeFi borrowing innovation, which actually predates its trendier more happening cousin Aave...

What is Compound?

>“I shot an arrow into the air, 
It fell to earth, I knew not where; 
For, so swiftly it flew, the sight 
Could not follow it in its flight.” 
- Henry Wadsworth Longfellow, *The Arrow and the Song*, 1845

Moving into 2022, the world is facing record-breaking inflation rates across the board. The ongoing pandemic underpins longer-term financial effects such as [supply chain issues, fuel consumption rates, property ownership and more](https://theconversation.com/inflation-hits-3-5-but-one-high-number-wont-budge-the-reserve-bank-on-interest-rates-175045). Uncertainty and imbalance is the name of the game, leading to more and more people searching for viable alternatives outside of traditional banks and their wavering interest rates to invest and reap higher yields. DeFi has opened this gateway.

Savings accounts as we know them rarely promise more than 0.05-0.5%, if you’re lucky. DeFi accounts promise usually 3-8% on annual percentage rates (APRs), if not many more orders of magnitude! It almost sounds too good to be true!

Rather than letting your money sit in a bank vault for anonymous managers to play around with or lend to others, DeFi is set up for you to direct the funds exactly where you want it. The multi-faceted approach of DeFi through use of smart contracts, dynamic liquidity pools and more, ensures unprecedented APRs for anyone willing to take the dive.

The way DeFi returns yield so high can be broken down into four main angles:

| Mechanism of Yield | How it Works | Typical APR | Common Examples |
| ----------------------- | ---------------- | ------------- | ----------------------- |
| Staking Rewards | Compensation for putting your hand up to help “secure the blockchain”. It’s like putting your own crypto to work for the global network in verifying transactions for the blockchain. | 5-6% | You can stake ETH on most centralised platforms such as Kraken, Coinbase or Binance. Platforms like [Lido](https://lido.fi/) also provide liquidity for staked assets. |
|Lending Rates | Interest earned for providing cryptocurrency for others to borrow. Cuts out many of the middlemen in traditional banking by using smart contracts and global liquidity pools to connect lenders and borrowers. | 4-10% | AAVE and Compound are two of the most prominent lending platforms and the ones used by Block Earner. |
| Exchange Rewards | Compensation for providing funds to global exchange services. It’s like you are a part-owner of a foreign currency exchange booth at any airport or tourist trap in Europe. | 5-15% | Any decentralised exchange like [Sushi](https://sushi.com/). Thousands of different tokens are available to users. You earn a cut of all trades that are done with any of those funds. |
| Fee Distributions | Fees charged by various platforms that are distributed to their token holders. Kind of like ‘buying into’ a company or platform that you want to support long-term. | 3-5% | The above mentioned Sushi also have a feature for their token holders called the [‘Sushi Bar’](https://docs.sushi.com/products/yield-farming/the-sushibar). This is not staking crypto in the sense of validating a blockchain, but merely a way of retaining users and encouraging a platform to grow based on token staking. |

 
These four main pillars of DeFi yields show that a solid 5-10% APR is near guaranteed for investments. There are two more avenues that ‘promise’ astronomical rates of hundreds, if not thousands of percent on APR.

The first is by incentivised liquidity pools. This consists of essentially dishing out rewards for new users to onboard with a platform. It is considered risky with the considerable inflation or crashes that may occur, and already have in some cases - check out [IRON’s story for more](https://www.coindesk.com/markets/2021/06/17/in-token-crash-postmortem-iron-finance-says-it-suffered-cryptos-first-large-scale-bank-run/).

The last ‘too-good-to-be-true’ is that of auto-compounding protocols. Using the mathematical miracle of compound interest, it is possible in theory to make an investment that with 200% APY - annual percentage yield (accounts for compounding interest), not annual percentage rate (only relies on simple interest).

Traditionally, to utilise compound interest in DeFi involved manually managing your interest from multiple sources. [The field of automated compound services is still emerging](https://medium.com/dehive/apy-or-apr-whats-the-difference-in-crypto-469d0da4b3c4), but for now, be wary of anyone promising something that sounds too good to be true.

DeFi is a highly dynamic field with many angles that can be put to work for you and your assets. Block Earner understands the insides and outs of these four pillars of APR, and facilitates stable cryptocurrency returns in the increasingly volatile and uncertain world around us.

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The multi-faceted approach of DeFi through use of smart contracts, dynamic liquidity pools and more, ensures unprecedented APRs for anyone willing to take the dive.

How is DeFi Yield So High?

Interest rates, and the way they are applied to DeFi investments, are different from what you might be used to in the traditional finance world.

Terms like APR (annual percentage rate) and APY (annual percentage yield) are methods of calculating interest earned on investments and are commonly seen in the world of DeFi investments - **but what do they mean, and how are they different from each other? **

Before you invest in DeFi, it’s helpful to understand what these terms mean so that you can understand what kind of returns you’ll receive, and choose the best DeFi investment options based on your needs.

**In this article, we’ll explore the following questions:**

- What Is APR?
- What Is APY?
- What Is The Difference Between APR And APY?

# What Is APR?

APR is a term traditionally applied to money you’ve borrowed, typically for things like credit cards, personal loans, and home loans.

When an APR is applied to credit products, it indicates the percentage of interest you have to pay for the amount you’ve borrowed and is usually inclusive of any other fees and charges that apply to the credit you’ve borrowed. **When APR is applied to money you’ve borrowed, the lower the rate is, the less it will cost you in interest charges.**

**In the world of crypto and DeFi, the annual percentage rate (APR) is the rate of interest an investment will earn in a year.** APR (sometimes known as simple interest), is calculated on the principal amount of your investment and does not include any compounding interest.

# How Is APR Calculated?

APR in crypto and DeFi is calculated using the following formula:

**APR = Periodic rate x number of periods in a year**

**For example**, if you invested $5000 for 1 year at an APR of 10%, the balance of your investment at the end of the 1 year period would be $5500. This balance is made up of your principal investment of $5000, and the $500 your investment has earned at a rate of 10% p.a.

# What Is APY?

The annual percentage yield (APY) is the amount of interest your investment will earn in one year, including compound interest, expressed as a percentage rate. Generally speaking, the higher the APY and the more frequently it compounds, the higher you can expect your returns to be. In the world of DeFi, APY is a great way to earn passive income.

**For example, if you invested $5000 for 1 year at an APY of 10%, compounded daily, the balance of your investment at the end of the 1-year investment period would be $5525.78.**

The effect of compounding interest allows you to earn interest on the interest your capital generates, which means that you can expect a bigger return on your investment. By simply choosing an investment account that harnesses the power of compounding interest and calculates your returns by using APY, you can make your money work harder for you.

# What Is Compound Interest?

[Compound interest](https://moneysmart.gov.au/saving/compound-interest) is calculated using the principal amount of the loan, plus the interest that has accumulated over previous periods. Compound interest is the interest of an investment, calculated based on both the initial principal invested and the accumulated interest from previous periods.

The formula for calculating compound interest is as follows:

**Compound Interest = P[(1+r)^n – 1]**

P = Total principal r = interest rate n = length of investment (in years)

An easier way to calculate compound interest is to use a [compounding interest calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator).

**Understanding the effects of compound interest and using a calculator to calculate your potential returns** is a great way to gain a deeper understanding of the true returns of an investment product, and will help you decide if a particular investment is the right one for you.

# What Is The Difference Between APR And APY?

The difference between APR and APY is **compounding interest** - a difference that can make a significant impact on the returns of your investments. **The returns on an investment with an APR generally are lower** than an investment that calculates your returns using APY, because you only earn interest on the principal investment amount.

**Here’s an example that illustrates the difference in returns between APR and APY, and shows just how powerful compounding interest can be:**

If you invest $5000 at an APR of 7%, the return on your $5000 investment after one month would be $29.17

If you were to instead invest that $5000 at an APY of 7% (interest compounded daily), the return on your investment after one month would be $29.25.

The early returns of APR and APY are similar, but compounding interest grows exponentially, while the returns of APR are linear. In addition to this, **the longer you invest with APY, the greater this growth will be.**

The graph below shows this difference, and the power of compounding interest on the growth of the returns of an investment with an APY vs APR.

![Simple-vs-Compound-Interest-1 (1).png](https://strapi-service-execution-strapibucketc6c2af7f-1mq96udu0clbb.s3.ap-southeast-2.amazonaws.com/Simple_vs_Compound_Interest_1_1_6f30de49cf.png)
**Image courtesy of** [Corporate Finance Institute](https://cdn.corporatefinanceinstitute.com/assets/Simple-vs-Compound-Interest-1.png)

# Looking For An Easy Way To Earn APY?

Block Earner offers [both fixed and variable yield account options](https://blockearner.com.au/yield/). **Our fixed yield account offers an APY of 7%, and our variable yield accounts offer variable yields up to 18%.**

**Your yields are compounded daily, there are no lock-in contracts, and you can withdraw your funds at any time.**

Download our app now via the [Apple App Store](https://apps.apple.com/au/app/block-earner/id1609152428?utm_campaign=App%20Store%20Clicks&utm_source=Website&utm_medium=Mobile%20App&utm_term=App%20Store) or [Google Play](https://play.google.com/store/apps/details?id=au.com.blockearner&utm_campaign=Google%20Play%20Clicks&utm_source=Website&utm_medium=Mobile%20App&utm_term=Google%20Play), to open an account and start earning daily compounding yields today!

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The difference between APR and APY is compounding interest - a difference that can make a significant impact on the returns of your investments.

APR vs. APY

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