The Practical guide to using Decentralized Finance (DeFi)

DeFi is an emerging technology created on blockchain technology and Ethereum. It has the potential to fill up inadequacy in the traditional financial system.

The massive growth DeFi has attained in the past 2 years has been tremendous. It has grown from zero to over $200 million and has the potential to represent the 31st largest US bank according to statistics by the Federal Reserve.

It shows how much people are interested and active in the space, despite that there are still people who don’t have a clue of what’s going on here and how to participate in the system.

This article is written to help you get started in the world of DeFi. If you don’t have basic knowledge about Decentralized Finance, read this.

Key objectives

  • Tools needed to start
  • How to set up a wallet
  • How to buy a cryptocurrency
  • Different ways you can use DeFi applications
  • Risks involved in DeFi

Tools needed to get started with DeFi

First, you will need to get a wallet that supports Ethereum. Why ethereum you may ask? Ethereum is the blockchain where DeFi applications are created because of its smart contract functionality.

Metamask, Trust Wallet, Coinbase wallet are some of the wallets you can use to access DeFi applications.

You should also have some money set aside to experiment and convert to cryptocurrency in order to deposit in your wallet.

MetaMask is one of the most popular wallets and I will explain how to set up the wallet on your mobile phone.

How to set up a MetaMask wallet on your mobile phone.

1. Go to your Mobile phone App store and search for Metamask and install the app.

2. Once it has been installed, open and click on Get started.

3. Click on create a new wallet.

P.S If you have a wallet before, you can import it using the seed phrase.

4. Read and agree to the terms and conditions.

5. Create a password for the wallet. Make sure you use a strong password.

6. To make your wallet more secure, you will be given a Secret recovery phrase that is made up of 12 words. I will advise you to write it down and keep it safe.

P.S No one should know it and losing it will make you inaccessible to your account and funds.

7. You will be asked to also verify the seed phrase to make sure you got it down.

8. Now you have successfully created your wallet.

The next step is to purchase your cryptocurrency.

Purchasing your first cryptocurrency

There are about 13000 cryptocurrencies created and so much to pick from but since we are focused on DeFi based apps. Ethereum is the best bet you can get.

ETH is used to pay for transactions and grant access to Apps. They are available on Centralized exchanges like Kucoin, Binance, and Coinbase.

The amount you choose to buy is solely dependent on the amount you are able to risk. It can be $20,$100 or even $1000.

How to buy Etheruem using Binance.

1. Create an account with Binance through the website or the application.

2. You are required to fill in your details and necessary documents for account approval. Then you will be able to send and receive crypto.

3. There are different ways to buy Ethereum;

  • Credit/Debit card.
  • Peer to Peer trading
  • Bank deposit.

4. The instructions are quite easy to follow and simple.

After buying the coin, you will transfer it to your MetaMask wallet. Here is a detailed tutorial that will show you how to transfer ETH tokens to your decentralized wallet.

You are finally ready to start interacting with the applications.🎉

Different ways you can interact with DeFi applications.

  • Lending and borrowing services

Decentralized Application you can use: Compound.

It’s a decentralized lending and borrowing platform built on the Ethereum network. It currently supports users borrowing or lending ETH, UDSC, DAI, USDT, and others.

Just like traditional finance when you borrow money you pay a certain interest when returning the money. It’s no different here. Also lending your tokens to the liquidity pool accrues higher interest on your capital. To know more about Compound click on this link.

  • Decentralized exchange

Decentralized application you can use : Uniswap

Uniswap is a decentralized platform where users can swap tokens without a third party, supply liquidity to the liquidity pool, and earn money. There are no restrictions and anyone can list a token for sale. It’s safe and easy to navigate. You can access Uniswap to start exchanging tokens.

  • Yield Farming

Decentralized application you can use: Aave

Aave is one of the most popular yield farms on Ethereum. Users are able to stake their assets in the smart contract and earn rewards and the platform native token. You can also lend, borrow tokens and supply liquidity. To get started on Aave click on this link.

Risks involved

In as much as interacting with DeFi seems great and exciting. There are risks attached to it so it’s best to be aware of its shortcomings.

One of them is a smart contract failure. DApps are a series of smart contracts, they handle everything going on in the app from processing payments to approving transactions. If there’s a bug in the smart contract, hackers can steal funds. There’s no way to recover it back.

Impermanent loss is also a major problem. It is the change in price of a token from when deposited in the liquidity pool to present time. Cryptocurrencies are known for volatility. The price is rarely stable. When you decide to lock up your funds and there’s a change in the price of the token,loss is inevitable.

In DeFi you are solely responsible for your finances, not any bank or financial institution. Make sure you do your research before investing.

If this article has helped you to get around DeFi, give 50 claps, and a comment.

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