What is DeFi? (And How to Get Started)
In this article, we will explain what DeFi is, and how you can easily navigate and use it.
If you’ve been in the crypto space for some time now, then you must have come across the term “DeFi”. DeFi stands for “decentralized finance”,which is an overall term to describe a variety of financial applications in cryptocurrency or blockchain – enabling application of decentralization on financial intermediaries such as banks. You’re all aware of how centralized financial institutions operate. They hold all the money deposited by you and other customers, and whenever you need to send the money to someone or a loan from the bank you’re subjected to a long, bureaucratic, and tedious process. Other than the inefficiency, the bank takes some percentage of the money in terms of transaction fee.
What DeFi does is to make financial transactions faster, cheaper, and generally more efficient. A DeFi application makes it easy for people to transact money without the need to trust one another. That is, DeFi platforms are built on blockchain to help facilitate financial transactions with the help of smart contracts. DeFi is allowing crypto entrepreneurs to recreate traditional financial instruments in a decentralized architecture, outside of banks or central authorities’ control.
Smart Contracts are automated applications that act as intermediaries. This is a piece of code in the blockchain that helps peers (humans and applications such as other smart contracts) to interact on the platform without the need to trust each other. The code of Smart Contracts is always available to the public, that’s why the blockchain technology is often called “trustless”
Where DeFi is mostly applied
Since DeFi came to the financial scene, it has become popular in many financial sectors. DeFi is mostly applied with decentralized exchanges, lending & borrowing, stablecoins, derivatives, and insurance. However, application of DeFi in the financial industry is still at its infancy stage of testing, and there is hope that the sector will find better ways of adopting the decentralized applications.
DeFi covers almost everything in the financial industry. For example, the lending and borrowing sector has become the biggest adopters of DeFi, with investors depositing their digital assets and earning interest from borrowers of those assets. In this arrangement, there are no middlemen, hence the loans become cheaper. This is unlike the mainstream lending and borrowing industry where middlemen take their cuts, hence making the process expensive for both the lender and the borrower. Through DeFi, the two parties, lender and borrower, interact through smart contracts in a more transparent and efficient way. This allows the lender to release or disburse loans quicker, and get higher returns. The borrower, on the other hand, receives the loan faster and pays more affordable interests on assets borrowed. The whole process is easy, convenient, and transparent.
The Emerging DeFi Projects
There are a host of DeFi applications that have emerged in the recent past, all based on special protocols to facilitate the decentralization of financial services. Applications such as Compound, Dai, and Dharma, have cut special niches in the market through unique offers to their respective users. For example, Dai, a Bitcoin-like digital token aiming to be a global currency without any element of control from a central institution. Its value is pegged to the USD, which significantly reduces the volatility that has limited Bitcoin’s practical usability in the trade industry. Dharma is another DeFi application that allows users to issue and underwrite debts in exchange for investment returns.
Many companies are using DeFi Applications today, including Cashcall, Elite Acceptance Corp, AFC Acceptance, CIG Financial, First Access, and Global Lending Services among others.
How to Interact with and Use DeFi
When you are using DeFi, you are not required to create an account. The first step is to set up a wallet from where you can transact your funds. The wallet works like the physical wallet, hence you have full control of it. You connect your wallet to the platform and allow it to interact with it (through your authorization). The DeFi platform will not be able to conduct transactions if you don’t allow it.
A wallet comes with a seed phrase (also known as seed recovery phrase), that can be used to regain access to your funds. The private key is the personal passcode to access your funds and you should store it safely to ensure no unauthorized person accesses it. If a third party with malicious intentions access your private key they can easily take control of your funds.
While there are many wallets, I will use Metamask to illustrate how to interact with a wallet.
As one of the self-hosted wallets, MetaMask is primarily used to store, send and receive Ethereum or other Coins and Tokens. It is one of the most convenient wallets to store, send and receive your Ethereum and ethereum-based tokens. TokenMarket platform supports MetaMask and with its easy to use interface you can seamlessly invest in STOs, ICOs or trade on TokenMarket exchange with your MetaMask wallet.
This particular guide is for installing MetaMask on the Brave browser. Brave has gained popularity in the crypto industry because of its unmatched privacy and security. Here are the simple step-by-step instructions on how to install the MetaMask wallet in your Brave browser on a Windows PC. Since Brave is a fork from Google Chrome, you can also follow this tutorial if Chrome is your browser of choice.
To install MetaMask on Brave browser, follow the steps below:
Step 1- Go to Metamask.io in your Brave browser. Click on “Download now” and then “Install MetaMask for Brave”. It should take you to the chrome web store. This page will appear as shown in the picture below.
Step 2- Once you get to the chrome web store, click the “Add to Brave” link. This will open a popup in your browser to confirm the adding of MetaMask to your extension. This process will install the extension into your browser. Click “Add Extension.” By Clicking “Add Extension”, you’re installing the MetaMask extension on your browser. Congratulations! You have successfully installed MetaMask.
Step 3- Click “Get Started. In the next screen, two options are available: Import wallet and create a wallet. The import wallet allows you to import components of your wallet if you already have a MetaMask installed on another PC. Otherwise, “Create a wallet” option is all you need if you do not have a wallet installed anywhere or you don’t need any information from the older wallet installed on the other PC.
Step 4- Next step: Setting a password for Metamask. The password must be more than eight characters. This password is very important because you will need it to sign in to your MetaMask every moment you want to access your account from your browser. The same password will be required to sign transactions. Therefore, other than the general requirement here to make the password more than eight characters, try and follow basic principles of creating a strong password such as using numbers, at least a capital letter and other characters other than letters.
Step 5- Secure Metamask: Download your seed phrase, select the phrase in order and confirm the secret backup phrase. A combination of your “secret backup phrase” and “password” is the most important component in ensuring the safety of your coins in MetaMask. Note down these seed keywords. We highly recommend doing this physically, on a piece of paper, and not just in your notes app. Following, you need to enter the written down words in the correct order to finish with the setup.
Step 6- Click “Confirm” and you have just successfully created your MetaMask wallet and the following screen will be visible to you. Following, you can send some ETH
Step 7- You can now operate your wallet. Your set up is complete and you are now ready to transact Ethereum and Ethereum-based tokens to your wallet. As soon as you have some liquidity on your wallet, you can start using all the amazing applications that are out there. If you want to send or receive BNBs you need to set up the Binance Smart Chain (BEP20) on Metamask.
DeFi has emerged as the new juicy morsel for Blockchain and Crypto industry. The overriding goal of DeFi applications is to reconstruct and revolutionize the global banking system away from the central authorities controlling it. Some believe that DeFi will even make the mainstream financial systems more transparent and resilient against global financial crises.