How to get started with Decentralized Finance (DeFi)
If you have been following cryptocurrency at all you would most likely have come across the term Decentralized Finance (DeFi).
This article is intended to give an overview of what it is and how you can get started with this new financial system.
I highly recommend giving a quick run through this article before you follow along step by step.
What is DeFi?
DeFi is a movement in the cryptocurrency space that intends to provide you with the same financial services that you can get from Banks and Financial Institutions but in a decentralized manner.
The traditional financial services that most of us should know:
1. A safe place to custody your assets (savings account with a bank)
2. A yield on your savings
3. Insurance
4. Loans
5. Trading such as stocks, commodities and various other assets
I won’t go into detail as to the benefits of DeFi or why it’s important, but you can check out this 3-minute article on why centralization is not working for our current financial system: The real winners of the Gamestop Saga.
So how can you get started with this new financial ecosystem?
Here’s a quick breakdown:
1. Buy Ethereum using cash from a Centralized Exchange (Luno, Binance, Coinbase)
2. Withdraw Ethereum into your self-custody wallet (Metamask)
3. Start interacting with Defi applications!
If you are a complete beginner, don’t be overwhelm, I will do my best to walk you through every step in a clear manner!
1. Buying Ethereum
Firstly you will need to get your hands on Ethereum.
This is because Ethereum is a Turing-complete blockchain. Which simply means that programmers are able to build out applications (smart contracts) on top of this blockchain.
These applications (smart contracts) can range from games, social networks, DeFi or even other “ERC20” tokens such as the infamous Dogecoin.
At the moment, Ethereum has the largest ecosystem of applications. And if you are wondering if Bitcoin has the ability to create smart contracts, the answer is no. Bitcoin is purely “digital currency”.
So where can you get Ethereum?
Well, you will most likely have to convert whatever cash you have in your bank to Ethereum. So that means you will need an account with a Centralized Exchange, below are a few links you can use to sign up with them.
If you would like to support me you can click on the “affiliate link” which will have my referral code otherwise you can always opt-out by clicking on the “no affiliate link” which will not contain any referral code.
- Luno — Affiliate Link / No affiliate Link
- Binance — Affiliate Link / No affiliate Link
- Coinbase — Affiliate Link / No affiliate Link
As a beginner, remember to only put in what you are willing to lose!
2. Self Custody!
To interact with the decentralized ecosystem, you will need to custody your own assets.
Which simply means you will need to create a brand new wallet to hold whatever tokens you have such as Ethereum or various other ERC20 tokens.
Fortunately, it isn’t very hard, in fact, you can even install it as a chrome extension. Below is a link to a wallet that is widely used and accepted.
Metamask — Here’s a 3-minute guide to metamask (the guide is optional).
Once you have downloaded the browser extension for metamask a new page should open with a “get started” button, click on it and you will be brought to the following page:
Click on “Create a Wallet”, then it will ask you if it would be ok to collect anonymous data from you, select agree or disagree based on your preference.
Once done you will be brought to a “Create Password” page like the image above.
Make sure you enter a strong password.
After creating your password, you will be brought to a Secret Backup Phrase page.
Without getting too deep, if you ever lose access to your metamask, this secret 12-word phrase will allow you to regain access to your wallet.
So never share it with anyone.
Now, your wallet will have been set up and you are ready to start interacting with the decentralized ecosystem!
You just need to get some Ethereum into this wallet.
To do this, you will need to withdraw the Ethereum that you purchased from step 1.
So go to the Centralized Exchange that you bought your Eth from, and look for the “Withdrawal” page, once there make sure you select the “Ethereum Withdrawal” option. This step will vary based on your chosen exchange.
Once found, it will most likely ask you for an “Etheruem Wallet Address”. This Wallet Address that we want to put in will be from the Metamask Wallet that we just created.
To get your Metamask wallet address you will want to open metamask (by clicking the extension icon).
Once opened, your wallet will look something like this, with the wallet address starting at “0x…”.
Clicking on it will copy the wallet address to your clipboard.
Once copied, simply paste it onto the withdrawal page on the Centralized Exchange.
Before clicking on withdraw, ensure that the first few characters and the ending characters of the wallet address are similar. In my case, my full wallet address is “0xbC052Ef3137D262E14E1377Ae200e3cC254a123b” so I need to ensure that “0xbC05” is the starting characters and “123b” for the ending characters.
If everything is good, simply click withdraw and depending on your selected exchange the withdrawal time might vary, but giving it up to an hour should be good.
If you’ve made it this far, great work! We are done with the hard part and you’ve officially begun your journey into a whole new decentralized ecosystem.
3. Start interacting with Defi applications!
Well, that’s really it, what happens next is really up to you.
You can either decide to exchange your Etheruem for some Dogecoin, stable coins or any other coin built on the Ethereum blockchain, you can take a loan, lend out your Etheruem to generate some interest and even margin trading!
So instead of me telling you what to do next, I will post down some things you can do and a few links to where you can do it!
Have fun and make sure to only try out these protocols in small amounts until you are confident with what you are doing.
Decentralized Exchanges
Swap your Etheruem for other tokens, or swap your other tokens back to Ethereum, whatever you want!
Lend or Borrow Money
Here you can either take a loan or deposit your assets to generate interest for you!
If you are wondering how these protocols are able to give you such high interest when your own bank can only offer you 3% per annum at most, it’s simply because these protocols have zero employees.
These protocols are automated by lines of code, with zero overhead. So most of the profits generated are returned to the “liquidity providers” or much simply, people who provided those assets to be lent out.
Margin Trading
Use at your own risk! Please ensure you understand what you are doing as a trader before using these protocols.
NFT Marketplaces
What are NFT’s?
Put simply, they are rare digital assets that only exists on the Ethereum blockchain.
Games
- CryptoKitties
- Axie Infinity
- Decentraland — Honestly, the coolest game so far
Closing Thoughts
I hope you were able to find this guide useful, there a lot of things that were simplified or I explicitly left out so I encourage you to do more research on your own.
Here are a couple of resources you can check out:
- Finematics — Great videos detailing how protocols such as Aave or Uniswap works under the hood!
- Staying safe — Very important!
