What is DeFi and how do I use it?
What is DeFi?
If you're involved in the cryptocurrency world, chances are you've heard of the term "DeFi." But what is DeFi? In short, DeFi is short for decentralized finance. It's a movement that's taking the crypto world by storm, and it's one that shows no signs of slowing down.
So, what exactly is DeFi? And how can you get involved? Read on to find out.
What is DeFi?
As the name suggests, DeFi is all about decentralization. Unlike traditional financial systems, which are centralized and controlled by central authorities, DeFi is powered by smart contracts on the Ethereum blockchain. This means that there's no need for third-party intermediaries like banks or financial institutions.
Because of this, DeFi applications are often referred to as "trustless" - meaning that users don't have to rely on trusted third parties to make sure that everything goes smoothly. This also makes DeFi applications more secure, as there's no single point of failure that hackers can target.
Examples of DeFi Applications (DApps)
There are already a wide range of DeFi applications up and running on the Ethereum blockchain. Some of the most popular include:
-Compound: A lending platform that allows users to earn interest on their cryptocurrency holdings. -MakerDAO: A stablecoin platform that allows users to collateralize their crypto holdings to generate Dai - a stablecoin pegged to the US dollar. -0x: A protocol that allows for the decentralized exchange of Ethereum-based tokens. -Kyber Network: A decentralized exchange that allows for instant token conversions. -Augur: A decentralized predictions market platform.
These are just a few examples - there are literally hundreds of different DeFi applications already up and running (with more being created all the time!)
How to Get Started in DeFi?
If you're interested in getting involved in the world of DeFi, there are a few different ways you can go about it. Firstly, you can simply start using some of the popular DeFi applications that are already up and running. For example, if you hold Ether (ETH), you could deposit it into a platform like Compound or MakerDAO in order to earn interest on your holdings. Or, if you want to trade cryptocurrencies without having to go through a centralized exchange, you could use 0x or Kyber Network.
Another way to get involved in DeFI is by developing your own application or protocol. If you're a developer with an idea for a new project, there's a good chance you'll be able to raise funding for it by selling digital tokens (known as an initial coin offering, or ICO). Alternatively, if you don't have your own project but still want to get involved, you could always contribute your skills towards developing existing projects.
whichever way you choose to get involved, remember - the world ofDeFI is still in its early stages, and there's plenty of room for growth and innovation. So jump in and get started today!
For beginners, the DeFi world might seem a bit complicated and overwhelming, but once you understand the basics, it's relatively simple. In this article, we will explore DeFi and provide a step-by-step guide on how to use it.
Step 1: Setting Up a Wallet
Before you can start using DeFi, you need to set up a cryptocurrency wallet that supports the Ethereum network and other EVM networks. A wallet is a digital storage space where you can keep your crypto assets. There are many wallet options available, including hardware wallets, software wallets, and web wallets. For simplicity sake, as your first wallet going into DeFi, we recommend starting with MetaMask for easy interaction with DApps.
Step 2: Buying Ethereum (ETH) / Networks Native Currency
DeFi is built on the Ethereum network, so the first thing you need to do is buy some ETH. For other EVM chains like BSC, you will need to purchase that chains native token, for example BNB for Binance Smart Chain, SOL for Solana etc. You can purchase these tokens from a centralized exchange like Coinbase or Binance, or from a decentralized exchange like Uniswap or SushiSwap. There are even some on-ramps for fiat such as moonpay that can allow you to skip the centralized exchange step completely. Make sure you Do Your Own Research (DYOR) on steps are best for you!
Step 3: Understanding DeFi Protocols
DeFi protocols are the building blocks of the DeFi ecosystem. They provide various financial services such as lending, borrowing, trading, and yield farming. Some popular DeFi protocols include Aave, Compound, MakerDAO, and Yearn Finance. DeFi is a large sector of cryptocurrency and there are thousands of DApps, utilities, and platforms available to facilitate a lot of use cases. It's always important also to do your due diligence before investing or transacting with any of these protocols or applications. While DeFi is abundant with opportunity and amazing technology, it also has its fair share of scammers and malicious actors waiting to prey upon those less experienced.
Step 4: Deposit into a DeFi Protocol or Application.
Once you have the required currency for that network and protocol you've chosen to invest in, you can deposit it into the DeFi protocol or DApp. Usually you will do this by connecting your wallet to the DApp via a ‘wallet connect’ button on the website. From there it should be a straightforward process of approving and transacting your funds.
Lending and Borrowing Example
Lending and borrowing is one of the most popular use cases for DeFi. You can lend your crypto assets to borrowers and earn interest, or you can borrow crypto assets and pay interest. For example, you can deposit ETH into Aave and earn interest on it versus just holding it in a wallet with no earnings.
DeFi also allows you to trade cryptocurrencies without intermediaries. Decentralized exchanges like Uniswap allow you to trade any ERC-20 token, including ETH and other DeFi tokens. In this example, you would simply need to buy ETH and then select a DeFi token you'd like to purchase and simply make the swap on Uniswap or other decentralized exchange / swap. It's important to note here that anyone can create a token, so always do your due diligence and research before investing. Using a good tool like coinscan to quickly determine token safety and viability is key for succeeding in this sector of DeFi. This is especially true for newly deployed tokens, as those are the most risky.
Yield Farming Example
Yield Farming is the process of lending or staking your crypto assets to earn rewards. You start by supplying liquidity to the pool by wrapping your native token (ETH for example) with the yield farming protocols token (FARM for example, this means you have to buy it separately as well) into a yield farming pool, creating a FARM/ETH wrapped token. After depositing this into the pool, you will earn a portion of the rewards generated by the liquidity pool. Yield Farming is much more volatile than lending and borrowing, as you are exposed to the price of the wrapped token (in the earlier example it would be FARM). As Farm goes up and down, so too does the value of your wrapped FARM/ETH tokens. It is also important to understand HOW the yield is being farmed by the protocol, if it's sustainable, and what plans the team has for keeping it going. The sad reality is most yield farms are just glorified ponzi schemes with no real utility or yield generating revenue aside from just getting more and more buyers into the pool. Always DYOR.
Stay Safe in DeFi!
DeFi is still a relatively new and evolving space, so it's important to be cautious and stay safe when interacting in the sector. Make sure to only invest what you can afford to lose and to always do your own research before investing in any DeFi protocol or token.
DeFi offers a whole new world of possibilities for financial transactions and services, and it's accessible to anyone with an internet connection. By following the steps outlined above, you can start using DeFi and exploring all that it has to offer. Just remember to be cautious and stay safe, and you're sure to have a great time in the DeFi world.
About the Author
Denis is an avid Crypto and Blockchain Enthusiast. Having founded a crypto marketing company in 2020, and being full time in the space for over 5 years now, Denis is a big believer in the future of web3 and the potential it has to change the world.