Heard of decentralized finance (DeFi) but don’t know where to begin? This article is for you!
Before we dive into the nitty-gritty, if you’re not familiar with the concept of DeFi, or don’t know what the hype is about it, please check this article.
Now, let’s get started!
Similar to traditional finance where you need to have a bank account to access financial services, you need to create a wallet to access DeFi apps. However, one major difference is that banks will safeguard your assets (at least in theory). But in the cryptocurrency space, you’re the bank.
Yeah, you read that right! You need to store your secret recovery phrase (aka seed phrase) in a safe place when setting up your wallet. Because whoever knows the secret recovery phrase controls the wallet. Put differently, your secret recovery phrase is the equivalent of your password and account combination in traditional finance. So you never, ever, share your secret recovery phrase with anyone, under any circumstances. Sharing your phrase will result in a loss of funds, with no recourse.
There are multiple choices when it comes to software wallets. But MetaMask is the most widely supported wallet for DeFi applications. So just install it on your browser and on your phone.
Once you’ve set up your wallet, the next thing is to get some tokens for paying for “gas”. I know, I know. Confusing right?
In the world of blockchain-based networks, there are network participants called miners or validators who run a cluster of computers to validate transactions on a blockchain and package them into blocks. Since each block only has limited space in it, you need to pay a tip, or “gas fees” as we call it, to incentivize the miners to prioritize putting your transactions into a block. The gas fees are denominated in the native currency of that blockchain. For instance, for Ethereum, its native currency is the Ether (ETH) and for Binance Smart Chain, it’s the Binance Coin (BNB).
If you just want to dip your toe into this DeFi space, it’s better to start with using DeFi apps on Binance Smart Chain (BSC) than Ethereum, since it costs a lot more money to use apps on the latter chain. You can check sites like Coingecko or Coinmarketcap to find where you can acquire the tokens used for gas fees.
Once you’ve been through the previous steps, you’re ready to try out different DeFi applications!
As a starter, you can try to swap tokens on a decentralized exchange (DEX) like Uniswap on Ethereum or Pancakeswap on BSC. The benefit of using DEXes is that you get to choose from many more coins than on a centralized exchange thanks to the permissionless nature of DeFi.
Another entry-level application is a money market such as AAVE (on Ethereum and Polygon) where you can lend out your tokens to earn interest on deposits and borrow assets against your deposits. The yields on these platforms can outperform those in centralized exchanges because there is no middleman involved in the lending process. The advantages over centralized services like BlockFi are DeFi’s trademark openness, transparency, and self-custody—you can start lending and borrowing without any account set-up, and your funds remain under the control of your wallet at all times.
Congratulations! Now, you’re among the single percent of the people in the world that have ever used any DeFi applications.
Check the list below if you want to try out more advanced DeFi applications. You can also check sites like DeFi Pulse or follow crypto Twitter to find out the emerging DeFi applications.