DeFi is much more than just buying volatile coins. You can access crypto's financial upside with minimal volatility (and built-in flexibility)! Read this post to learn how to make DeFi work for you.
DeFi (aka decentralized finance) is a great place to invest & reliably grow your money. (Click here to learn what DeFi is). But the second you hear the word “DeFi”, you think about crypto & its volatility. Yet, Burst is built on the premise that you can safely earn stable returns using DeFi. How is that possible?? Let me explain:
Volatility
‍When most people think about investing in crypto, they think about buying a cryptocurrency (like Bitcoin) and hoping the price goes up. This is very similar to buying a stock - the price goes up and down. And in crypto, the price goes WAY up or WAY down. Burst doesn’t invest in crypto stocks and hope for the best. Rather, we loan out crypto similar to a bank loaning out money (although we are not a replacements to bank accounts). As a result, we are able to make consistent stable returns even during bear markets and crashes. Let’s learn how lending works:
Banks use the money people put into savings account and loan it out to borrowers. They earn interest and reward the savings account owner with a small amount. Similar to banks, Burst uses the money you put into your Burst account, converts it into digital dollars, and loans those out to borrowers. This process is facilitated by smart contracts. Smart contracts are digital contracts run by code. They are super efficient and cannot be changed under any circumstances.
When borrowers take out a loan, their collateral is locked up in a smart contract. They have to put up more collateral than they take out (this is called overcollateralization). In addition, they agree to an interest rate and a payment date. If the loan is properly repaid by the payment date, the payment & its interest go to the lender (aka you) and the borrower gets their collateral back. If they do not pay (aka default on their loan), their collateral is automatically liquidated by the smart contract and goes to the lender. It’s that simple. Rather than hoping that a cryptocurrency goes up, we trust that the code will run properly. That is the beauty of saving with DeFi & Burst.
You may be wondering, “But how does that benefit me? Why should I save my money using DeFi?”
There's 2 reasons you should use DeFi:
1. DeFi has more upside than traditional finance.
‍In today’s world, traditional savings accounts return ~0.1% interest per year. Meanwhile, Burst Secure historically earns 5% interest even in previous bear markets (check out our FAQ to learn how). You may be wondering, "why not just invest in stocks to earn more?" In the long term, stocks are relatively reliable (ex: the S&P 500 averages 7% interest per year). But in the short term, stocks can be volatile (ex: the S&P 500 is down 16% in the last 7 months). With Burst, you can earn more without dealing with the volatility.
‍2. DeFi is more flexible than traditional finance.
With its volatility, stocks can be a risky place to put the money you plan to use in the short/medium term. But at the same time, savings accounts earn you nothing. Your money loses its value to inflation, which is at a 40-year high. To get the "best" of both worlds (high interest, low volatility), banks offer Certificates of Deposit (or CDs). Right now, the average 5-year CD rate is 0.65% (not very high). And, this requires you to lock up your money for 5 years. Nobody wants to do that. With DeFi (& Burst Secure), your interest compounds every 15 seconds. So, you earn in real-time and can take your money out whenever you want.
What’s The Catch?
‍There are lots of ways to make money in DeFi. But it isn’t perfect. Unlike traditional banks, DeFi is not FDIC insured. So, if your money gets hacked or stolen, there is not the safety net of the government-backed insurance. With that being said, the code behind our partners like Compound is heavily audited and has never been compromised. Barring an unlikely hack, the code & smart contracts will continue to work properly. In addition, all of our loans are overcollateralized - at least 125% of the amount of the loan. So, even if the borrower defaults, we will get 125% of our principle back. Click here to learn more about Burst's investment risks (and how we mitigate them).
Conclusion
‍DeFi is a great place to save and grow your money. Burst Secure helps you access the financial upside of DeFi without dealing with the volatility. And, you can pull your money out whenever you want. With that being said, we do not believe it should replace your savings account. Rather, it should be a part of a well rounded investment portfolio.