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Enter DeFi Part 1

This article is intended to be a beginners guide to take the first steps into Decentralized Finance (DeFi). DeFi is a rabbit hole. You can go deep. And to many, it’s overwhelming. But like anything, it’s one step at a time. So, let’s start with the basics.

I’m going to recommend setting up two centralized finance accounts (CeFi). The first one is Coinbase and the second is Binance. If you’re in the US you will need to sign up with Binance.us. The function of your two CeFi accounts is to onboard and off board your fiat currency from your bank account onto and off of an exchange. Once you have those two accounts set up, connect your preferred bank account to your wallet.

Next, you will need to download Metamask. Metamask is a non-custodial wallet, meaning, you have complete ownership and responsibility of your wallet through your private keys. You will be provided a secret phrase when you sign up for Metamask. Don’t loose it and don’t provide it to ANYONE. Unlike Coinbase and Binance, you are 100% responsible for your security. Between these two CeFi exchanges and Metamask you will be able to access many of the coins in DeFi.

There are loads of other CeFi exchanges and just as many non-custodial wallets which could be discussed. However these three accounts will allow you to take the first steps to DeFi.

Keep in mind, when you onboard your fiat currency and make your first crypto purchase, it will take at least 6 days on Coinbase and 10 days on Binance for your bank funds to clear. As a result, Coinbase and Binance will not release your crypto from their exchange until the transactions clear from your bank account. This means you will not be able to send the crypto to your Metamask wallet for 6–10 days. Keeping in mind that your funds will be locked for up to 10 days, I always purchase a stable coin first to avoid the risk coin depreciation while the transaction clears. Once you transfer the stable coin to Metamask, you have entered DeFi and the fun begins.

A note regarding online safety. Remember, in DeFi you are in control of your finances. This is a great power and a great responsibility. I recommend utilizing Brave for your browser, Duck Duck Go as your search engine, a VPN (I use express VPN but there are many options), and using Proton Mail for your email account. If you value your data, your identity, and your money, these tools will help keep your data anonymous and your assets safe.

Now I’d like to provide a few basic definitions and context for your journey into Decentralized Finance:

Centralized Finance (CeFi): Centralized Exchanges are effectively companies with a centralized structure. They are legal entities with a hierarchical structure most are accustomed to in corporations such as a Board of Directors, a CEO, a subordinate executive team, and so on. It’s important to know that CeFi organizations have access to your wallet and crypto currency. Because they are participants in standard finance and securities laws, they are beholden to governments and actively participate in Know Your Customer and Anti-Money Laundering (KYC/AML) laws. Like a bank, they will share your information to governments which can and will seize funds for any necessary reason the organization or government would deem necessary. They can also go bankrupt and become insolvent. See the story of Mt Gox. A classic DeFi axiom to heed is “Not your keys, not your coins.”

Decentralized Finance (DeFi): DeFi is a system of finance based on secure distributed ledgers and removes the control institutions have on money, financial products, and financial services. Decentralized finance eliminates fees that banks or institutions would charge for their services and typically share those fees with the coin holders, liquidity pools, and/or the protocol itself. Depending on the blockchain, transactions clear within seconds or sometimes minutes which is sharply different than traditional finance rails that take days or weeks to clear accounts with multiple centralized organizations involved.

Fiat Currency: A government issued currency with no hard assets for backing. It is a currency because the government declares it a currency and demands taxes and debts be paid in the particular fiat currency by its citizens and debtors.

Custodial Wallet: A custodial wallet is a digital wallet with private keys that are held by the service provider, such as an exchange. Coinbase and Binance both provide custodial wallets. They have the private keys. You have access to your wallet. But like a bank, so do they. Again, not your keys, not your coins. If you want control of your finances I recommend utilizing custodial wallets solely for onboarding and off boarding your fiat currency to and from your bank account.

Non-Custodial Wallet: A non-custodial wallet means that you are the only ones with the private keys, and thus, access to your wallet and money.

That’s all for now. This is the very beginning of your decentralized financial journey. Enter DeFi Part 2 will be on configuring Metamask for multiple blockchains and transferring coins from your CeFi wallet to your Metamask wallet.

Cheers,

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