What is DeFi? Step by step guide to get started

How to get started DEFI
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Here is a step-by-step guide on how to get started with DeFi.

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 client on the same level as bankers. 

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.

What is Uniswap in DeFi?

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 make money 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.

How can Uniswap and DeFi help?

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 DeFi is disrupting the financial system which is why we aim to educate people on newer technologies that are more reliable and better suited for individuals seeking financial freedom.

How does staking work?

Staking in DeFi is an umbrella term covering all DeF activities that require temporary commitment of crypto assets. With staking you lock crypto assets into a smart contract in exchange for becoming a validator in a DeFi protocol or a Layer 1 blockchain and earning rewards for performing the duties the role requires

What are the different kinds of DeFi staking?

Staking

DeFi staking in general allows you to lock your crypto into a DeFi smart contract and become part of the network’s validators. This is a great way of making passive income out of your crypto while at the same time contributing to making a network more secure.

Yield Farming

Yield farming is another passive investing method in DeFi where investors profit from rewards, transaction fees, interest, and price hikes. It involves locking your crypto into a liquidity pool and facilitate trading, lending and borrowing.

For example with yield farming you can lend DAI through Compound (COMP), which then lends coins to borrowers. You can then rip the interest earned daily and get paid in COMP coins that can also appreciate in value.

Liquidity Mining

Liquidity mining is a subset of yield farming. Using liquidity mining as an investment strategy in DeFi involves locking crypto assets in various blockchain protocols to earn passive income.

It is very similar to yield farming with a few differences. It is more competitive because farmers are forced to chase liquidity pools with the highest APY rate. Yield farming protocols distribute, alongside fee rewards, Liquidity Pool tokens as well and when these are farmed, the risks of impermanent loss increase.

Impermanent refers to the net difference between the value of two cryptocurrency assets in a liquidity pool-based automated market maker (AMM).

Learn more about Decentralized Finance (DeFi) with DappRadar´s Ultimate Guide.

What is Compound Finance?

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.

According to data by DappRadar, The Compound Protocol has an all-time value locked of over $4,03 billion locked.

Essentially, Compound is a decentralized borrowing and lending platform based on Ethereum. The Compound protocol supports lending and borrowing of a particular selection of cryptocurrencies.

Here are some of the main tokens that Compound supports:

  • USD Coin (USDC)
  • Ether (ETH)
  • Wrapped BTC (WBTC)
  • DAI
  • Basic Attention Token (BAT)
  • Tether (USDT)

In the following example, we will see how you can use the Compound Finance to save some money using the DAI cryptocurrency.

How to use Compound with DAI?

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 stablecoin 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.

This is how to get started in ten simple steps.

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 in a completely passive and decentralized way. 

Save money hassle-free with DeFi

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

You could save money hassle-free with a nice APR % with only ten steps. Without 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.

Should DeFi be regulated?

Although Decentralized Finance (DeFi) gives its users a lot of power offering a plethora of services that no bank can offer, it is not all peaches and cream.

DeFi protocols are reliant on the blockchains that they are built on and can experience many kinds of cyberattacks. These attacks can for example happen through the exploitation of protocol-specific bugs that deplete users of funds.

Also, attacks can happen through so called “flash loans” which are loans of tokens without collateral that can then be used to influence the price and make a profit, before quickly repaying the loan etc.

The results are not good for the users who end up losing their money and liquidity can run out if everyone withdraws their cryptocurrencies from liquidity pools at the same time (a “bank run” scenario).

Regulators worldwide are working on regulating crypto and DeFi in particular. For them there are three basic concerns: the fight against money laundering, terrorist financing, and consumer protection.

Investors should educate themselves well before venturing into crypto, especially DeFi. As to whether DeFi should be regulated or not, this depends on who you ask.

Some believe that doing so helps cultivate a culture of transparency and consumer protection, which eventually is positive for the overall adoption of DeFi and crypto.

However, others believe that the whole point of DeFi is to remain decentralized as its name suggests, which means that it should not be accountable to regulations, since these need centralized actors to be implemented.

We at DappRadar are monitoring this topic very closely. Here is all you need to know about crypto regulations worldwide.

How can you use DappRadar for DeFi?

First, make sure to connect your wallet to DappRadar and become a Pro user so you can enjoy our platform to its fullest. However, any user can track their favorite DeFi dapps and get a full overview of the DeFi landscape by using our DeFi Rankings Tool.

Here you can filter dapps by protocol and gain access to real-time accurate data and supplemental information regarding all the information you need to make sound decisions.

Using the Uniswap example above, you can also access Uniswap through DappRadar after connecting your Metamask wallet to our platform.

Learn how to connect your wallet to DappRadar

The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research.

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