The biggest buzzword in the crypto space today – DeFi, short for decentralized finance – has made finance cool again. Apart from making financial products decentralized and easily accessible to users of all stature, DeFi platforms such as MakerDAO also offer users the option to generate passive income on their crypto holdings, including Bitcoin (BTC).
In his latest live Q&A broadcast, prominent crypto personality Andreas Antonopoulos shared the best ways to generate passive income with Bitcoin (BTC) using DeFi.
Generating Passive Income on Bitcoin
What’s the next best thing to HODLing Bitcoin? Perhaps earning a little side-income on it.
DeFi protocols based on the Ethereum blockchain make this possible by offering attractive interest rates on the lent BTC.
While decentralized finance (DeFi), has been touted as the future of finance, due to its promise of providing alternatives to traditional finance and fostering financial inclusivity, the fact remains that DeFi still has a long way to go before achieving complete success, as bad actors have continued to exploit its vulnerabilities in a bid to get rich quick
In the latest of such development, an unknown sophisticated smart contracts engineer has successfully launched an attack on Balancer Labs, stealing more than $500k worth of altcoins from the platform’s Statera (STA) and Stonk (STO) lending pools.
Per sources close to the matter, the bad actor orchestrated the attack by sending two complex transactions to the Ethereum Mainnet within the space of several minutes, draining the two pools.
Specifically, the hacker crafted malicious smart contracts designed to carry out multiple transactions with a single transaction and then proceeded to obtain a FlashLoan of 104k Wrapped Ether (WETH) from the decentralized exchange, dYdX.
The WETH tokens were then swapped to STA token back and forth 24 times, thereby draining the entire STA balance from the lending pool.
That’s not all, the attacker then swapped the 1 weiSTA to WETH multiple times, taking advantage of the STA implementation to get more WETH from the pool without giving back STA. The hacker repeats the above steps to empty the WBTC, SNX, and LINK tokens in the pool.
Antonopoulos explained that through DeFi, one can put their crypto holdings to productive use. Specifically, one could lend their Bitcoin to a DeFi platform such as MakerDAO and start earning interest on it. However, he cautioned that putting capital to such work carries risks as well.
The tech entrepreneur added that by using DeFi contracts, one can convert their BTC into Ether (ETH) or Dai and subsequently put Dai in a platform where it could be lent out.
For the uninitiated, Dai is a stablecoin pegged to the U.S. dollar, used for lending. Dai is created whenever a borrower takes out a loan on MakerDAO. Later, they are required to pay back the loan in Dai.
However, Antonopolous added that moving from a Bitcoin platform to an Ethereum platform carries risks. He said:
“You’re going to be moving from Bitcoin to an Ethereum-based platform, and the security isn’t quite equivalent. Ethereum has advantages and flexibility and it pays a small price in security as a result.”
“You expose yourself to a variety of new risks. You may have increases in the gas price, which leads to other cascade problems. And all of those things can cause you to lose some or all of your invested capital.”
DeFi Still in Its Infancy
The author of several best-selling books on cryptocurrencies, including Mastering Ethereum, noted that despite the technical robustness of smart contracts, they are still at a very early stage and it is almost impossible to guarantee that a smart contract does not have any bugs.
These fears are not unfounded as, to date, there have been numerous incidents of DeFi protocols being exploited by sophisticated cyber attacks, duping investors to the tune of hundreds of thousands of dollars.
With that said, Antonopolous believes that despite such risks, DeFi is inarguably the best way to earn money on BTC holdings. That is, if one wants to put their BTC to any use at all.