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Understanding DeFi: a beginner’s guide

Starting out in decentralised finance can feel daunting. The journey to monetary freedom is an exciting one filled with endless possibilities, but there’s a lot to learn when you first enter this new world. Here at Monolith we believe that DeFi on Ethereum will have a profound impact on all of our lives over the years to come, so getting a head start early on will probably be a huge benefit in the future. By taking the first steps to join us now, you’re already halfway there.

This beginner’s guide is designed to help you master the basics of crypto, DeFi, and Web3. Digest it along with our 7 Steps to Living Bankless guide, and you’ll have everything you need to transcend. Welcome to the future.

What is DeFi?

“DeFi” stands for decentralised finance, a term used to describe a vast ecosystem of powerful financial tools that run on the Internet free from the control of any intermediaries. It’s often referred to interchangeably with the phrase “open finance”, because it creates an open system, where everything can be verified on the blockchain. DeFi has the potential to be hugely disruptive. It could eliminate the need to trust third party legacy institutions and make finance more accessible to millions of people around the world.

DeFi in its current form mostly runs on Ethereum, a blockchain that uses its own Turing-complete programming language. Ethereum’s programming language allows anyone to write immutable smart contracts, automated lines of code that execute transactions on the network. Smart contracts can be used to write complex programs, which has helped create a sprawling network of applications we collectively refer to as DeFi.

In DeFi, you can use your crypto assets to lend, borrow, send, earn, spend, trade and more, and it has many advantages over the traditional financial system. As DeFi largely centers on Ethereum, it offers composability — each of the tools that make up the network can be used in different combinations with relative ease. As a result, DeFi protocols are sometimes described as “money legos”, because they allow you to stack different activities on top of one another like building bricks.

Ethereum has created a new financial system that will likely change the world forever. Though there are many risks to using this technology in its infancy, DeFi’s success could ultimately transform our society for the better. Learning how to use it now presents a huge opportunity to capture part of that success.

How to get started

Enter the Monolith

You can access DeFi through the Monolith wallet. When you download our app, you get your own address on the Ethereum blockchain. Using the app, you can get exposure to crypto pioneers, DeFi staples, stablecoins, yield-bearing assets, and more. Our ParaSwap integration lets you interact with DeFi’s leading applications, and you can use our Visa card to spend your assets at 45 million locations worldwide.

Download the Monolith app here.

Store your Seed

You should always back up your Seed

Your Seed, or “seed phrase”, is a 12 or 24 word phrase that can be used to unlock your wallet’s private and public key. It’s essentially a password to gain access to your crypto assets. For this reason, it must be kept safe — you should never share your Seed with anyone.

When you download Monolith, you’re advised to write down your Seed on a piece of paper and store it in a safe place. We provide paper for this, but some people like to store their Seed on more durable material, such as laminated card or metal. You may also want to store parts of your Seed across multiple locations, to avoid having one single point of failure.

Learn more about your Seed here.

Download MetaMask

The MetaMask login screen

MetaMask is a Web3 wallet developed by ConsenSys.

It’s a “hot wallet”, which means that it’s connected to the Internet. MetaMask functions as a browser extension, and can be used to access the various applications that form the DeFi ecosystem. It also allows you to swap between tokens, and can be used to connect to your Monolith wallet.

Learn how to import your Monolith wallet into MetaMask here.
Download MetaMask
here.

Use Etherscan

The Etherscan home screen. You can find your Monolith address and transaction history using the search bar.

Etherscan is “the Ethereum blockchain explorer”. It’s most frequently used for tracking Ethereum transactions. You can use it to view all of the activity associated with your wallet, as it records all of the data from the blockchain. It also provides useful analytics such as Gas Price estimates, the network utility rate, the number of daily transactions, and more. It can also be used to connect to your Monolith wallet.

Learn how to import your Monolith wallet into Etherscan here.
Visit Etherscan
here.

Buy ETH

To use Ethereum, you need to have some ETH to pay for transactions. Every transaction on the network requires a small amount of ETH known as gas. As well as being the fuel for the network, ETH acts as Ethereum’s reserve currency. It’s widely used across the DeFi ecosystem. You can buy ETH through Monolith with any Visa or Mastercard at competitive rates.

Learn more about gas here.
Learn more about buying ETH with Monolith
here.

DeFi Blue Chips

DeFi has grown at an astonishing rate and new innovations are emerging every day, but there are a handful of time-tested projects that are widely regarded as “blue chips” of the ecosystem. These are trusted protocols that contain billions of dollars in total value locked, which is a useful metric for assessing their usage.

Aave’s V2 market

Examples of DeFi blue chips include:

Aave — Aave is a lending and borrowing liquidity protocol. You can earn attractive interest rates for lending your assets to a liquidity pool. When you deposit assets, you receive aTokens which earn interest in real time. aTokens such as aDAI are also available in Monolith.

Synthetix — Synthetix is a liquidity protocol for synthetic assets. It allows you to create synthetic currencies, crypto tokens, commodities, and more by staking the SNX token. From there, they have access to frictionless trading.

MakerDAO — Maker is the protocol that created DAI, one of DeFi’s most used stablecoins. By taking out a Collateralised Debt Position and depositing crypto, you can borrow DAI to use elsewhere in the DeFi ecosystem.

AAVE, SNX, and DAI are all supported in the Monolith app.

Learn more about Aave here.
Learn more about Synthetix
here.
Learn more about MakerDAO
here.

Layer 2

Layer 2 is a framework built on top of the base chain in order to improve scalability. Ethereum is the world’s most used blockchain, thanks in small part to the growth of DeFi protocols that run on the network. This means that the network can suffer from congestion. Layer 2 solutions aim to solve this issue by carrying some of the traffic load away from the main chain. Layer 2 solutions come in various different forms, including channels, plasma, sidechains, rollups, and validium. As Ethereum can be expensive to use when the network is busy, it can be beneficial to use Layer 2 to carry out high-speed, low-cost transactions.

Examples of Layer 2 projects include:

zk.money — zk.money enables private payments on Layer 2 by leveraging ZK rollups. It was developed by Aztec Network.

Polygon — Polygon uses a variation of plasma and runs its own Proof-of-Stake consensus algorithm, acting as a sidechain to Ethereum mainnet. It will also soon implement ZK rollups, optimistic rollups, and validium chains. Polygon has its own token called MATIC, which can also be used to top up the Monolith card.

zkSync — zkSync is a ZK rollup solution that’s designed to be compatible with the Ethereum Virtual Machine. It’s set to launch sometime this year.

Optimism — Optimism is a highly anticipated scalability stack that uses optimistic rollups to group transactions together. It’s set to launch sometime this year.

Learn more about zk.money here.
Learn more about Polygon
here.
Learn more about zkSync
here.
Learn more about Optimism
here.

Useful websites

There are several useful websites you can use to help you on your journey. Here are some of our favourites:

DeFi Pulse is a popular data analytics site

DeFi Pulse — DeFi Pulse gives up-to-date data related specifically to the decentralised finance ecosystem. You can use it to see the total value locked in DeFi, sort projects by categories, learn about the leading DeFi protocols, and more.

CoinGecko — CoinGecko is arguably the best data analytics website for the wider cryptocurrency space. It’s commonly used to search the leader board of projects, which sorts each cryptocurrency by market cap. You can use it to track the performance of projects, as well as the cryptocurrency market as a whole.

Dune Analytics — Dune Analytics pulls in data from across the DeFi protocols on Ethereum. You can use it to see the growth of each app, the total number of DeFi users, and much more.

Zapper — Zapper is an interface for tracking and managing your DeFi assets. You can use it to see your whole portfolio, join liquidity pools, farm yield, and much more.

Visit DeFi Pulse here.
Visit CoinGecko
here.
Visit Dune Analytics
here.
Visit Zapper
here.

Learn more

There are many more resources available for learning more about decentralised finance on Ethereum. Some of our recommended tips include:

Monolith — check our blog for more “Understanding DeFi” features explaining core concepts, “Monolith Spotlights” insights into some of our favourite projects, “Monolith Reflects” think pieces on the future of DeFi and Web3, and more.

Bankless — Bankless is an educational blog, newsletter and content production studio run by Ryan Sean Adams and David Hoffmann, two of Ethereum’s most prominent voices. Their work largely focuses on Ethereum and the DeFi ecosystem that runs on top of it. Check their weekly podcast, released every Monday to hear from major players in the space.

DeFi Dad — DeFi Dad runs a popular YouTube channel where he posts helpful tutorials on how to navigate the often confusing world of DeFi.

The Defiant — The Defiant is a popular blog and YouTube channel founded by journalist Camila Russo. Look out for the team’s high-quality documentary-style video features on YouTube.

The ETH2.0 staking launchpad on Ethereum.org

Ethereum.org — Ethereum.org is an educational resource funded by the Ethereum Foundation. It explains how to use Ethereum, stake ETH, core concepts, and more.

ETH Hub — ETH Hub is an educational resource run by Ethereum evangelists Eric Conner and Anthony Sassano. It runs a weekly podcast called Into the Ether focusing on the latest developments in the Ethereum space.

The Daily Gwei — The Daily Gwei is a popular daily newsletter focusing on the Ethereum ecosystem. It’s written by Anthony Sassano.

Now you have all that you need to go into the ether. A world of discovery awaits you, one where you can gain control of your finances and experience monetary freedom through DeFi on Ethereum. The decentralised finance revolution has begun. Are you ready to join?

Download the Monolith app here.

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