DeFi 101: A HUMANS Guide to Decentralized Finance
As HUMANS enter a new phase of cryptocurrency euphoria, DeFi (Decentralized Finance) has been receiving some serious attention. The new DeFi narrative may look familiar to some, bearing similarities to the ICO run of 2017. According to DeFi metrics site DeFi Pulse, the total value locked (TVL) in the DeFi ecosystem has increased over 40X from June 2020(~$1 Billion) to Fe ( ~ $40 Billion). This in itself speaks for the popularity of DeFi projects. So let’s dive in.
What is DeFi?
DeFi or Decentralized Finance aims to provide an open alternative to traditional financial products such as general banking services, insurance, loans, and much more. HUMANS might argue that every decentralized cryptocurrency can be referred to as decentralized finance but DeFi in this context refers to a class of highly-experimental and gamified financial products. The non-custodial nature and highly incentivized structures have helped these products attract a lot of investors to the space.
Simply put, DeFi is that new popular kid on the block that a large number of HUMANS are talking about. Analogy achieved, good job!
How To Get Started With DeFi?
HUMANS have invented various smart contract platforms to develop DeFi products, such as Ethereum, EOS, TRON, and others. For the purpose of this article, AI is going to consider Ethereum and the dApps are developed on it, At the time of writing, Ethereum is the most popular and has the most liquid DeFi applications. Contrary to how complex it might look from the outside, HUMANS can get started with DeFi in just a few steps.
Initiate Purchase: Ether
The first thing a HUMAN will need to get started with DeFi on Ethereum is the Ether (ETH) token. Ether is the native token for the Ethereum ecosystem and USERS will need it for making transactions, buying/selling DeFi tokens, and paying the transaction (gas) fees. Once the USER acquires ETH, HUMAN DeFi experimentation can begin. Well done!
Interested HUMANS can SHIFT to ETH from any AI supported assets through SideShift.ai.
Move ETH To A Compatible Wallet
The second step is to get ETH on a wallet that can interact with the DeFi smart contracts through the web interfaces. Metamask is a popular wallet for this purpose. It can be installed as a browser extension or a mobile application. It generates an Ethereum address just like any normal wallet, to which Ether can be transferred for making transactions. AI recommends USERS to transfer a little more ETH than they “intend to use” as some of it will be spent on paying the transaction fees. AI recommends USERS to check the recommended gas prices before making any trades. USERS are also advised to backup their seed phrase to protect their assets. Good job!
Before getting started with the third step, AI would like to recommend HUMANS to do proper research before getting involved with any of these DeFi projects. Though the whole concept of DeFi sounds exciting, it has its share of flaws. Unlike traditional finance institutions, DeFi projects aim to eliminate centralized entities that take control by giving control to a smart contract. Smart contracts are just as good as the HUMANS who coded it. There have been several instances where the smart contracts were either hacked or got exploited due to bugs in the code.
AI suggests HUMANS to do their due diligence before getting involved with a DeFi project. Apart from looking at the project’s token economics HUMANS are recommended to go through these steps before getting involved with any DeFi project:
- Research about the team. A credible team implies increased chances of the product coming to fruition. Good job!
- Research the public sentiment about the project. This can be done by analyzing the social media chatter about the project.
- Research about the technical updates from the project team. This can be done by looking at the GitHub repository of the project’s smart contract. Some good projects publish audit reports.
Investing In DeFi
The USER can buy the relevant coin for the DeFi protocol of their choice once the USER has done enough research. DeFi enables the USERS to do this directly through the wallet by using an automated token exchange platform such as Uniswap or Sushiswap.
Apart from trading/exchanging tokens on Uniswap, USERS can participate in “pooling” by becoming a liquidity provider, by supplying crypto to the Uniswap contract, and earning a share of the exchange fees. Other popular alternatives to Uniswap includes Decentralized Exchanges (DEXs) such as 0x, Bancor, Kyber, IDEX, Balancer. All of these exchanges have slightly different architectures. While the new DEXes like Balancer and Uniswap make use of Automated Market Making (AMM), others like IDEX do not. 1Inch is a DEX aggregator that aggregates all DEXes on one website.
After getting started, the USER can play the DeFi game based on their interests. This can be done in many ways. Apart from the already mentioned trading and pooling (becoming a liquidity provider for a DEX ), another popular DeFi play is becoming a “yield farmer” by lending tokens for which USERS get rewarded in the form of governance tokens. yearn.finance and its YFI token along with compound.finance and its COMP token are some popular examples of this. More research on yield farming and profit analysis can be done on sites like yieldfarming.info.
There are other more experimental projects and volatile meme coins that attract investors. USERS might consider those based on their risk tolerance after doing their due diligence. Despite being called “decentralized”, developers - in some cases - have been known to hold master keys or leave a backdoor open in the smart contracts in order to fix buggy code. These can also lead to exploits. CAUTION ADVISED.
The Future Of DeFi
AI predicts an interesting future for DeFi, which is more decentralized with better and robust code. With the rise of projects like Tendermint’s Cosmos and the Polkadot project, the DeFi craze is likely to expand to more blockchains and that can be seen with the rise of DeFi projects on EOS and Tron blockchains. Even Binance, a centralized exchange, has launched a chain called Binance Smart Chain to promote DeFi (calling it Centralized DeFi). There are also some projects that aim to link the world of traditional centralized finance with DeFi. DeFi is definitely something to watch out for in the future.
Still confused? HUMANS can get started with DeFi on SideShift.ai. SideShift.ai can serve as your DeFi on-ramp and enables users to buy/sell DeFi tokens using popular cryptocurrencies without the initial complexity. Good job!