Introduction
The financial industry has undergone several and significant changes over the years, the traditional ways are slowly transitioning into the digital world, offering convenience and efficiency at its finest. And among the newest technologies that have drastically transformed the financial landscape is the introduction of decentralized finance, popularly known as, DeFi. This is a collection of financial services which solely relies on the blockchain technology, enabling direct peer-to-peer transactions, eliminating the need for centralized institutions such as banks and governments.
Its increasing popularity is mainly because of its accessibility, allowing individuals across the globe to engage with financial services as long as they have an internet connection and a crypto wallet.
Moreover, in this guide, we will further explore what DeFi is all about, its role in the finance industry, and a step-by-step process on how you can navigate into the space as a beginner.
Getting Started in Decentralized Finance
To get started into DeFi, you will only need two things - a crypto wallet and crypto funds. Here's how you can set up each of them:
Setting up crypto wallet
A crypto wallet will serve as your entry point into DeFi. This will act similar to a bank account where you will store and manage your cryptocurrencies. Many crypto wallets have emerged in the market and most popular ones are compatible with several DeFi applications which can be downloaded to either your mobile devices or can be downloaded as an extension to your browser. Using your wallet, you can directly interact with decentralized applications without the need for a middleman or other central authorities. One of the most reliable wallets now is Coinbase, here's how you can set it up.
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First, download the Coinbase Wallet app from the app store to your mobile device or get the Coinbase Wallet extension for your browser.
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Follow the steps and prompts provided in the app to create a wallet or you can also choose to import an existing one.
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Secure your wallet with a backup phrase, which is very essential if ever you need to recover your wallet in instances of forgotten passwords or whatnot.
Adding crypto to your wallet
Once you have successfully created a crypto wallet, you can immediately fund it with your preferred cryptocurrencies. If you already have assets in Coinbase, you can also transfer them into your wallet just by linking those two accounts. But if you currently have your assets in a different exchange, you will have to manually transfer your crypto holdings into your wallet using its unique address.
Exploring Dapps or Decentralized Applications
Dapps or decentralized applications are considered to be the building blocks of the DeFi ecosystem. These are apps that are all based on the blockchain which you can access through your crypto wallet. Dapps enable users to participate in numerous financial services such as trading, borrowing, earning interest and more.
While there are numerous blockchains that support dapps, the most preferred and common are with the BNB Chain, Ethereum, and Polygon. It can be accessed through the wallet's built-in browser or the Coinbase Wallet browser extension. If you're new to this, you might want to understand The Basics of Decentralized Finance first. Furthermore, here's how you can access the DeFi Dapps:
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As mentioned, you can access it through the Coinbase Wallet. So, first you will have to open your Coinbase app.
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Look and tap the middle icon which is the built-in dapp browser that's located in the bottom portion.
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Type in the URL of your preferred dapp or you can browse and explore popular DeFi applications directly within the browser.
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If you're using Google Chrome, it will be simpler if you install the Coinbase Wallet extension and directly connect your wallet to any dapp that you wish to visit for a more seamless process.
The Use Cases of DeFi
When you get to explore DeFi, you'll discover that the landscape offers its users several key services that are typically not available, limited or with restrictions in traditional financial systems. Here are the following:
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Lending and earning interest - This is among the simplest ways on how you can get involved in DeFi. Here, you can deposit crypto holdings in a lending pool in which you allow users to borrow your assets in a period of time and in return you will gain an interest. This can be one of your passive income generators.
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Borrowing crypto - In other words, you can make a loan and use your crypto holdings as a collateral in exchange for a fiat currency or other cryptocurrencies. The good thing with crypto loans in DeFi is that it's faster and easier as it does not rely on traditional banks at all which requires credit checks and are bound for a longer waiting period.
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Liquidity pools - In DeFi, these are pools of cryptocurrencies that facilitate trading and transactions. This allows users to become participants in the pool and be one of the liquidity providers where each will add equal parts of two different crypto assets. As a reward for the contribution, participants will be earning a share of the transaction fees that's generated by the pool.
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Yield farming - Another passive income opportunity in DeFi is yield farming, however, unlike other options, this is quite complex. Not really beginner-friendly. But, among other options, if done right, this is the most profitable. So, as a liquidity provider, participants will earn rewards in the form of tokens, whereas, advanced yield farmers typically move these crypto assets in different platforms to maximize returns. Definitely, this is a high risk high reward method that requires knowledge and in-depth understanding.
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DeFi insurance - Similar with traditional finance services, DeFi insurances help in protecting your investments in case something goes wrong along the way which includes the possibility of bugs in smart contracts or platform failures. Despite being an exciting and innovative space, it also comes with challenges and to mitigate these risks, DeFi insurance is highly recommended.
Conclusion
Getting started with DeFi can be overwhelming as you'll encounter all the different aspects and opportunities that come with this enhanced financial technology. But once you have successfully set up your wallet and understand the basic principles, navigating further through the landscape will become much easier. By following the steps outlined in this guide, you'll for sure be on the right track in participating in the DeFi world as well as earning passive income through its use cases. Just remember to start small, do your research, and consider the risks.
