YOUR DEFI JOURNEY
As Defi is acronym for Decentralised finance. (DeFi) is a newly emerging financial system built on blockchain technology. This system take on the role usually played by banks in TradFi.
DeFi is an alternative to TradFi that allows users more control over their funds. It is decentralised, meaning control is distributed amongst stakeholders in the system, instead of centralised, which refers to one institution (e.g., a bank) being in control.
You don’t need to be an advanced crypto trader to use DeFi applications, as long as you familiarise yourself with how to perform basic swaps and can be able to follow basic instructions.
BASIC STEP-BY-STEP GUIDE FOR DEFI BEGINNERS
Looking at Defi , there are various benefits it possesses for everyday persons and some haven’t really understood the nooks and crannies , but here let’s look at how to be in Defi at all
The basic guides ;
- Step 1 – Setting up your Defi Wallet
A custodial wallet is centralised, meaning you only need to set up a username and password. But it also means you hold less responsibility over your assets, as they are managed by a third party. It is a more user-friendly option; if you forget your password, our customer service team can help you access your account.
Non-custodial wallets — like the DeFi Wallet — gives you full control over your funds and private keys. You create a passcode and are issued a twelve-word recovery phrase. If you would like to further secure your wallet, set up biometrics and two-factor authentication. As you are the sole custodian of your assets, it is vital that you physically write this recovery phrase down and store it securely in an offline location (e.g., on a piece of paper or flash drive).
So since Defi is Decentralised as the name implies , use the non – custodial wallets mostly else the aim of the decentralization is defeated.
Wallets recommended include, Metamask, Math Wallet, Trust Wallet etc.
- Step 2 – Funding your Wallet and buying tokens
How to Fund Your Wallet
Next, you need to fund your DeFi Wallet.
How to Purchase Tokens and Coins
The next thing you need to get started with DeFi is tokens and/or coins. What kind of tokens or coins you choose depends entirely on your goals. Tokens have different functions and benefits, and some can be used on more than one blockchain.
So easily, tokens have blockchains on which they’re built on .
Majorly , some of these tokens are listed on Centralized exchanges which accept Credit/debit cards as means of buying these tokens you can easily buy these tokens and send from these Centralized exchanges to your Defi wallets where you can easily buy your preferred tokens on your favorite Decentralised exchanges.
Transaction Fees for Tokens
Transaction fees in crypto are also called gas fees. Note that gas fees are always paid in the native token of the network that the transaction is taking place on. Think of it like a country’s currency: ETH for the Ethereum chain, AVAX for the Avalanche chain, MATIC for Polygon, and so on.
Step 3 – Learning How to Defi investments which includes – Lending and Borrowing, Staking, Farming and Mining
Now that your wallet is funded with crypto, you can use it for DeFi. Lending and borrowing, staking, mining, and farming are the most common ways to interact with DeFi protocols.
Here is what these terms mean in detail:
Lending and Borrowing
Lending and Borrowing is one central element of any financial system. In DeFi, lenders (also called depositors) provide funds to the protocol and are able to earn a return on their funds that people borrow.
Because of instant availability, borrowers are willing to pay interest for assets to borrow. To borrow in DeFi, users need to over-collateralise. Overcollateralisation means the collateral’s value exceeds that of the loan borrowed — or simply, what you lock in is more than what you’re taking out.
Borrowers can use one token as collateral and receive a loan for another. In this way, users can farm yield (see below) with the borrowed coins and keep their initial holding, which may increase in value over time.
Staking
Staking is an activity that requires temporary commitment of crypto assets. DeFi staking refers to users locking a specific amount of tokens or coins to become a ‘validator’ in a Proof of Stake (PoS) blockchain network.
If you are interested in the technical details of validating blocks, find out in this article on how the Proof of Stake consensus works.
Beginners can participate in staking via staking pools and Delegated Proof of Stake (DPoS).
Staking pools allow people to deposit any amount of tokens into a pool to earn interest, based on the size of their deposit in the pool in relation to the pool’s total holdings.
DPoS allows everyday users to stake and ‘delegate’ their virtual assets to a trusted validator. In return, they receive rewards, while the validator fulfils the computing requirement on the blockchain.
One example of this is staking CRO in the ‘Earn’ feature in DeFi Wallet.
Yield Farming
A subset of staking, yield farming refers to a strategy involving lending or staking crypto assets to get rewards in the form of an annual percentage yield (APY).
You can also place LP tokens, which represent the amount of assets you have contributed to a liquidity pool, into a ‘farm’. This is another example of how you can be rewarded for your liquidity provision.
Liquidity Mining
In finance, liquidity refers to how fast an investment can be sold while maintaining its value. In other words, the more liquid an investment is, the quicker it can be sold, and the easier it is to sell it for its current market value.
Liquidity mining is a subcategory of yield farming that adds functionality to the crypto community. By lending your assets to a decentralised exchange (DEX), you are providing liquidity and receiving rewards, which most often stem from trading fees that are accumulated by traders swapping tokens.
Liquidity Pools
A liquidity pool usually comprises a pair of tokens, with a required value ratio of 1:1, with each pair creating a new market. Contributing to these pools makes you an LP, or liquidity provider. LPs need to contribute an equal value of both tokens to the pool.
As an example, if you deposited BNB and ETH into a liquidity pool, the pair gets swapped into a BNB-ETH LP token that represents the value of both currencies.
Every time a user makes use of the liquidity pool, they have to pay a small fee, which automatically goes to the Automated Market Maker (AMM). This is then paid out to LPs to the pool as a reward, proportional to the amount of liquidity they provided.
Roles of Smart contracts in Defi
Most of the existing and potential applications of decentralized finance involve creating and executing smart contracts. While a usual contract uses legal terminology to specify the terms of the relationship between the entities entering the contract, a smart contract uses computer code.
Since their terms are written in computer code, smart contracts have the unique ability to enforce those terms in an automated manner. This enables the reliable execution and automation of many business processes that currently require manual supervision.
Using smart contracts is faster, easier, and reduces the risk for both parties. On the other hand, smart contracts also introduce new types of risks. As computer code is prone to have bugs and vulnerabilities, the value and confidential information locked in smart contracts are at risk
Risks involved in Defi
While the DeFi world can offer appealing APYs, it is not without risks. Even though they are decentralized, you are essentially consuming financial services, and some of the risks are familiar:
- Counterparty Risk: If you take part in crypto loans or any other kind of lending, you’re at risk of the counterparty not repaying their debt.
- Regulatory Risk: The legality of certain services and projects can be difficult to ascertain. If you are invested in a smart contract that is subsequently shut down due to regulatory problems, then your funds can be at risk.
- Token Risk: The assets you hold have different risk levels affected by their liquidity, trustworthiness, token smart contract security, and associated project and team. As the DeFi pace has many low market-cap tokens, token risk can be particularly high.
- Software Risk: Code vulnerabilities can undermine the security of smart contracts you’re invested in. Your wallet could also be compromised due to connecting to DeFi DApps and giving them certain permissions.
- Impermanent Loss: If you’re staking in liquidity pools, divergences away from the price ratio you entered at will cause you to lose some tokens deposited in the pool if you withdraw.
Difference between Defi and Open Banking
Open banking is a banking system where third-party financial service providers are given secure access to financial data. This enables the networking of accounts and data between banks and non-bank financial institutions.
DeFi, however, proposes an entirely new financial system that is independent of the current infrastructure. DeFi is sometimes also referred to as open finance.
For example, open banking could allow the management of all traditional financial instruments in one application by securely drawing data from several banks and institutions.
Decentralized finance, on the other hand, could allow the management of entirely new financial instruments and new ways of interacting with them.
Now you see the difference between the two , which do you prefer
For me , Decentralized Finance .
Conclusion
Decentralized Finance is the real reason crypto is built because it aids perfectly the building of things independently without Centralized authorities noticing you and also people knowing who you are. It also supports a system of governance where every token holder has a right to be part of decisions on what happens in the system. This is not just a new dawn of finance , but a better one. Although every new tech come with it’s own benefits , it’s important you understand that also it comes with it’s challenges as well. So understanding the system properly will help you know how to stay positioned and also help you avoid scams.
See you on the good side , 👌
