How to Get Started in DeFi and How to Use DeFi Protocols

The Decentralized Finance (DeFi) sector is made up of a wide variety of financial products built to rival centralized financial products. To utilize DeFi services properly, you need to know some basic things, which will be highlighted in this article.

TL;DR

• DeFi practically offers users ease and accessibility over its counterpart, centralized finance.
• The majority of DeFi protocols can be accessed by using a non-custodial wallet or wallet extensions like MetaMask, MathWallet, etc.
• Before delving into DeFi protocols, it is important to understand how the tools work, and the various products and services DeFi offers

Regardless of the provision of comparable products, decentralized finance (DeFi) products and services vary differently from centralized alternatives, mostly because users have more control over their assets when using DeFi.

In order to ensure that everyone has easy access to financial services, the whole DeFi ecosystem is built on top of a public distributed network and employs self-executing agreements encoded into lines of code known as smart contracts.

If you’re yet to understand what Decentralized Finance (DeFi) is in simple terms, read my last article on DeFi. It gives an in-depth explanation of the concept and compares it to centralized finance, its popular rival.

Getting Started in DeFi

In contrast to traditional banks, DeFi does not require the opening of an account or filling out any application forms. Typically, DApps (decentralized applications), the majority of which now function on the Ethereum blockchain, allow anyone to interact with DeFi at any given time and from anywhere in the world, provided they have a smart device and an internet connection.

The majority of significant DeFi protocols now support a variety of blockchains, with the main differences being transaction costs and the simplicity of usage. Through wallet extensions and mobile applications like MetaMask, users may access networks like Ethereum, Binance Smart Chain, and Polygon with just a few tweaks.

Users can easily access their funds on their browsers or through these apps which are similarly installed as browser extensions or mobile applications. They often require users to either import a pre-existing wallet using a seed phrase (also known as a private key) or to create a new one. These wallets have their own built-in browsers (DApp browsers), which makes it simple and easier to interface with DeFi applications. They are also password-protected for further security.

It’s important to note before jumping into DeFi that the space is still largely unexplored and remains a very experimental area with a variety of risks attached to it. Exit scams, bogus ventures, rug pulls, and other scams are still quite prevalent in the DeFi space. It is advisable that you always do your own research before investing your money in any DeFi protocol, however attractive it may seem.

Some Popular DeFi Products and Services

We have already established the fact that the only way to engage with DeFi is by using DApps and that DeFi offers similar products and services to traditional finance. However, just like traditional banking, money is at the core of these products.

Using cryptocurrency to perform transactions is how DeFi is designed to function. The majority of the well-known and active DeFi protocols are centred on stablecoins, a cryptocurrency that is backed by an organisation or pegged to a fiat currency like the dollar.

Before entering the DeFi ecosystem, prospective users need to understand a few terms and how they work. Below are some of the top DeFi products and services you should know;

Decentralized Exchanges (DEX) or DeFi Currency Exchanges

A DEX is a peer-to-peer trading platform that enables users to trade cryptocurrency. A DEX not only allows for direct trading between participants without the necessity of a middleman, but users can also do so completely anonymously. Traders often have complete control over their wallets and have access to thousands of tokens through their exclusive private keys.

Some popular examples of decentralized exchanges are Uniswap, Pancakeswap, and Raydium, all built on different blockchains to facilitate DeFi transactions.

Stablecoins

Stablecoins are intended to reduce the high risk associated with many cryptocurrencies by being tied to stable currencies like the US dollar or, more recently, some form of an algorithm that keeps them fixed to the price of a chosen fiat currency.

Stablecoins are popular among several DeFi protocols because of their non-volatile nature and the ease they provide in terms of providing a benchmark for measuring transactions, and there is also the advantage of sending large sums around the world easily.

Popular stablecoins include USDT, USDC, BUSD, and DAI, which can be found on most of the top DeFi platforms.

DeFi Lending and Borrowing

Without the use of middlemen, DeFi protocols focus on making it simple to lend and borrow cryptocurrency. Interest rates may change with time because they are based on supply and demand. Most DeFi procedures call for borrowers to over-collateralize their loans in order to guarantee lenders’ repayment in the event of market turbulence.

Borrowers or lenders do not need to go through a difficult process or wait in long queues in order to receive funds because DeFi lending protocols employ smart contract codes to facilitate quick transactions. Additionally, these protocols do away with the requirement for credit checks and let anyone, anywhere, have equal access to borrowing cryptocurrency.

For example, imagine if a man bought 1 BTC at the price of $60k. However, he now has an emergency and needs $5k, but the price of BTC is now $25k because of the state of the market. Selling $5k worth of BTC at that price may be very challenging because that would mean selling at a loss. Instead, he could deposit, for instance, $10,000 worth of his Bitcoin into a protocol to obtain a $5k loan in a stablecoin using DeFi lending services. This will enable him to sort out his emergency without losing exposure to the price changes in BTC, and then he only needs to pay back the loan with interest.

A major example of a lending and borrowing platform is Compound Finance. Developed on the Ethereum blockchain and released in 2018, Compound Finance is a popular lending platform that provides users with the ability to earn interest by lending out assets or borrowing against collateral.

Liquidity Mining and Yield Farming

The automated market maker (AMM) approach is used by decentralized exchanges to carry out transactions on the blockchain using smart contracts as opposed to centralized exchanges’ usage of order books.

This indicates that trades on these protocols are executed using order books with pre-funded liquidity pools that contain the assets in a trading pair. For instance, in order to effectively run a BTC/USDT trade, a liquidity pool that contains both BTC and USDT would be required.

Users who contribute liquidity to these pools are subsequently eligible to receive fees levied against traders for trades executed on that pair. Liquidity mining is what this activity is called because users can profit merely by supplying liquidity to these pools.

On the other hand, yield farming is a well-liked strategy used by cryptocurrency traders to maximize and generate passive revenue from their tokens. Smart contracts are used by yield farm protocols to lock users’ tokens and charge interest on their locked assets. If funds are utilized for liquidity, users who lock tokens on yield farm protocols receive interest based on transaction costs; if funds are used for DeFi loans, users earn interest based on the loan interest.

Final Thoughts

The DeFi market is quickly moving to overtake the established banking system. DeFi has attracted a lot of attention by giving its users tools and products that are simple to use and easily accessible to anyone, anywhere in the world. The world of decentralized finance is headed toward success despite some of the challenges that come with being at the forefront of innovation.

If you have any more queries, kindly drop a comment or send me a direct message on Twitter (@lanre_aderemi). I will get back to you as soon as I can.

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