In this guide we’ll be helping you take your first steps into the boundless world of Decentralized Finance, better known as DeFi.
DeFi is a growing movement which has the potential to democratize access to financial services. This emerging ecosystem is being built on global, public and distributed networks such as Ethereum, and uses smart contracts – or self-executable digital agreements. It is highly interconnected and composable, forming a colorful financial system made up of “money legos.”
DeFi offers products and tools for anyone in the world to leverage sophisticated financial applications with minimal capital, and without having to trust a third party.
DeFi as an ecosystem consists of many sectors or categories, largely driven by:
- Lending – the ability to easily lend and borrow cryptocurrencies without intermediaries
- Decentralized exchanges (DEXs) – mediums to exchange assets while always retaining full ownership
- Derivatives – on-chain representations of complex financial vehicles packed into stand-alone assets.
- Insurance – protection against smart contract vulnerabilities or price volatility.
- Asset Management – ways to monitor, deploy and manage capital at your choosing.
You’ll notice that many projects use the term TVL, short for Total Value Locked. When users deposit funds into a DeFi protocol, it adds to the TVL, a financial metric to gauge relative ‘success’ or popularity within the wider sector. A popular site to see how these protocols rank is DeFi Pulse.
In this article, we’ll help you interact with the most popular DeFi protocols today, giving you a first glimpse into an endless rabbit hole of innovation.
Please note that this guide is meant to serve as an educational tool only, meaning none of the assets, products or services used are meant to be a solicitation or used as financial advice. Please proceed with caution and never invest more than you are willing to use.
Step by Step
Most of DeFi is being built on Ethereum, so in order to leverage a large part of the ecosystem, you’ll need the Ethereum network’s token called Ether (ETH), which is used to pay for transactions. Here’s a look at how to acquire Ether, and where to send it to tap into popular DeFi products.
Step 1: Set up an account on a crypto exchange
- Create an account at a crypto exchange like Coinbase.
- After setting your password, follow the on-screen instructions to verify your email and ID.
Step 2: Buy ETH
1. To make your first purchase, make sure you have a bank account, debit card, or credit card linked to your new Coinbase Account.
2. Click on the “Trade” button on your Coinbase Dashboard.
3. Preview your purchase after selecting the amount of ETH you want to purchase in dollars.
Buying ETH is necessary as it is required to perform transactions on the Ethereum network. Without ETH, you will be unable to access the vast majority of DeFi products.
Step 3: Set up an Ethereum wallet
1. Download an Ethereum wallet. This will be your gateway to DeFi.
2. MetaMask is one of the most popular ones. Navigate to the https://metamask.io/download.html
3. Download the appropriate version of MetaMask depending on the device you’re using and add as browser extension.
4. Setup a new wallet clicking on “create wallet” and set a new wallet password.
5. Very important: Store your secret recovery phrase somewhere secure. If you forget your password, this will be the only way to access your account as there is no entity storing your information.
6. View your new wallet address right below where it says “Account 1.”
MetaMask is the most popular Ethereum wallet, and one supported by virtually every DeFi application. You’ll be able to find your MetaMask address at the top of the browser extension.
Step 4: Withdraw to MetaMask
1. Click on the “Send/Receive” button in your Coinbase web-app (or other crypto exchanges)
2. Copy and Paste your newly-created MetaMask wallet address.
3. Confirm the transaction.
Now that you have ETH, you’ll need to send it to Metamask to take advantage of DeFi products and services. Metamask supports all Ethereum-based assets, meaning any ERC20 tokens can be sent to the same address.
DeFi Trading 101
How to: Use Uniswap to trade from ETH to Dai
Uniswap is the best place to find any supported token and trade. Watch for slippage, or difference in price from spot value, as it will vary depending on the asset’s liquidity. Uniswap depends on liquidity providers to supply assets to the protocol for other users to trade against. In return, they receive 0.3% of trading fees and stand to govern the protocol through UNI tokens.
DeFi Lending 101
How to: Use DeFi protocols to lend stablecoins
Both Aave and Compound are trusted DeFi protocols that have supported billions of dollars worth of volume. While both are very similar in principle, they slightly differ in terms of the assets supported and the incentives to use the protocol.
While Aave features a more diverse pool of assets, different types of borrows, and unique markets, Compound is largely seen as the most trusted US entity, with users being able to earn COMP governance tokens for lending and borrowing from the protocol.
DeFi Asset Management 101
How to: Connect your wallet to portfolio trackers
Both products offer a similar experience, with a slight differentiation on the deeper inner workings of the protocol.
While both Zapper and Zerion can be used to actively put capital to work, Zerion is better known as a platform for visualizing wallet assets and portfolio performance. It’s worth noting both trading and lending can be executed through these dashboards, however it’s good to get familiar with the protocols and front-ends themselves.
In this guide, we went through acquiring Ether (ETH), setting up a Metamask account, trading for DAI on Uniswap and lending that DAI on Aave or Compound. Now that you have eyes on Zapper and Zerion, it’s easy to keep a close tab on those positions as you collect interest.
From here, many users will explore the wider yield farming opportunities, allowing you to earn an added return on your capital for completing value-added actions in various DeFi protocols.
While the tools in this guide are certain to change with time, we hope you enjoyed this quick primer on getting a foundation in place to take advantage of the future of finance!