What is DeFi? Step by step guide to get started

what is defi
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DeFi, DeFi, DeFi…. Keep hearing it, but don’t know what it is? We’ve got you covered.

Decentralized Finance or DeFi is “a movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols that run without intermediaries”. In other words, it puts the average bank clients on the same level that bankers are on. 

With the power of the Ethereum blockchain, we can act as the exchanges, liquidity providers, and lenders with no hassle — contributing to increasing the liquidity and stability of the entire decentralized financial system, that we all create for ourselves and for our financial freedom needs.

Uniswap - What is DeFi?
One of the leading products of DeFi is the Uniswap exchange created by @haydenzadams.

Uniswap is completely on-chain and individuals can make use of the protocol, as long as they have MetaMask. Uniswap is a place where users can earn money by providing liquidity to the pair they want to. 

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So, if you want to support some token and its liquidity, you need to lock this ERC-20 token and ETH (worth exactly the same as liquidity providers need to act as both sides of the trade). It is not an easy topic, so for more information go to https://docs.uniswap.io/ and if you are looking for a way to earn with Uniswap, you need to search more about being a liquidity provider here.

We will use Uniswap as an exchange where we can easily trade ETH for DAI and vice versa, with no need to create an account or go through the KYC process.

In some countries, the bank gives you as low as 2% APR from deposits, but there are rules such as ‘You can’t withdraw the funds before the deposit period ends’. Also, you can’t use these funds as collateral or anything else. You just lock them and you need to wait a year or more. 

All this is advertised as the best investment offer available on earth. In addition, investors used to treat 6–8% annual returns as catching the best opportunity. Times have changed and this was my biggest motivation to organize this article to help educate people on newer technologies that are more reliable and better suited for individuals seeking financial freedom.

Earning interest - DeFi

Now we will use the Compound Finance service to save some money!

Compound is an open-source, autonomous protocol built for developers to unlock a universe of new financial applications. It focuses on interest and borrowing for the open financial system.

Compound - Earn Interest with DeFi
Compound is the protocol for algorithmic money markets on the Ethereum blockchain.

Now, if you start to feel overwhelmed by all of this new information, think about this example: most of us don’t know exactly how a mobile phone works, we simply send and receive calls. So, thinking about every aspect of the operation of financial instruments can be overwhelming. 

I’m not talking about being thoughtless and placing money wherever they allow us to. I just mean that an open approach and openness to new possibilities can be beneficial this time.

To operate with The Compound protocol and earn money 7.5% APR (at the time of writing), you will need to exchange your ETH into the DAI stable coin from MakerDAO. The best and easiest way to do it (no new account, no KYC needed) is to use the Uniswap exchange that is fully decentralized. You can use it right from your Metamask wallet and there is no need to send your precious tokens into any other centralized exchange.

Steps to save money 7.5% APR with Decentralized Finance

1. Log in with your MetaMask to Uniswap (https://uniswap.exchange/swap)

2. Unlock your ETH and DAI and allow Uniswap to interact with your tokens.

3. Turn your ETH into DAI

Uniswap - ETH to DAI

4. Wait a few minutes for the Ethereum blockchain to process the trade. After that time, you will see the DAI balance in the same window.

Uniswap - ETH to DAI

5. Go to https://app.compound.finance/ and log-in with your Metamask account.

6. Choose DAI from the available markets and click it.

7. This is the main panel where you see the statistics of your savings. Click on the green ‘Supply’ button as you want to lock in (lend to others that want to borrow it, so you give a “Supply to the borrowing power pool”) your DAI into the Compound smart contract.

8. Set the amount of DAI you wanna lock. Remember that you will be able to withdraw your DAI any time you want, moreover, you will take out all the gains you manage to collect during the time you lock the money into Compound.

DAI Supply

9. Once again, click the green Supply button and confirm the transaction in your Metamask

10. That’s it! You just start earning 7.5% APR in a completely passive and decentralized way. 


On the left of the main panel, you have overall statistics about the Compound savings rate and market liquidity. On the right, you can see your account information such as: how much you locked into the smart contract, what your borrowing power is and how much exactly you earned for supplying the DAI into the pool.

DAI Supply Balance

Like you see you can start saving money with nice APR % with only 10 steps. With no KYC, no new accounts, no mail confirmations and no hassle at all. There is no minimum limit for deposit. There are no penalties for canceling the deposit. You say magic, I say DeFi in a pure form.

Enjoying yourself? 

Check the next article in the series: What is the Play-to-Earn model and how can we benefit from it by playing Axie Infinity?

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