DeFi is a cool way to say Decentralised Finance, which involves building a brand-new financial system with underlying blockchain technology and enabling truly unfiltered access to global financial systems.
In a world where finance is gatekept and controlled by opaque institutions that seek to take a significant cut of every transaction, block off competitors and control customers, DeFi is critical to fulfiling finance’s true purpose.
DeFi has gained a lot of momentum in the past year or so as it crosses $1B worth of total value locked (at the time of writing). A lot of people have begun to show interest in DeFi, mainly because of its ability to continuously earn a good amount of interest on DAI (the famous USD pegged stablecoin).
I got my hands dirty with DeFi in late 2018, being 17 at the time I was not allowed direct access to traditional Finance, which is why the DeFi space fascinated me.
Before beginning with DeFi, I was curious about what was so different about it. As I dug deeper, I couldn’t help but notice the potholes in today’s financial system — age and geographical barriers, not secure enough, excessive documents and personal details required, slow and high transaction fees, etc.
But, how the heck do you get started? There is so much information out there on the web, and everyone’s telling you to do different things. Who do you listen to? Where’s the starting point? What if you get stuck in a Ponzi scheme?
Dang, it’s confusing, maybe you should just continue working with your traditional bank (?)
Well, hold on for a sec. I used to be a DeFi noob too. I had the same problems. I took out my first loan on the blockchain in late 2018, and I knew less than nothing about DeFi. However, because of DeFi being accessible to everyone, I was not surprised I got my ethereum account before my bank account, and I have been hooked on DeFi since then.
The motivation behind this is simple: I am not claiming that Decentralised Finance is all rainbows, but the fact that it is beginning to question traditional Finance and that there are an estimated 1.7 billion people who currently lack access to financial services even though the existing system has been continuously generating wealth, very little has been ended up going to this excluded population.
This is not quantum physics. It’s not wrong to want better financial services, and getting started now is undoubtedly the right thing to do.
I promise it’s simple and easy to understand, no stupid jargon. I’ve also added a few images to help you know more clearly. However, if you do get stuck anywhere around, send me an email or hit me up on twitter and we’ll figure it out together.
Awesome, let’s move on.
The 3 Simple Steps to get started with Decentralised Finance:
Requirements: Internet connection and working device.
So, without any further ado, let’s jump into step 1.
Decentralised Finance, unlike the banks, doesn’t have any central authority or a third party through which your transactions go through. DeFi is trustless.
Ever since cryptocurrencies have gone mainstream, there are so many internet wallets that allow you to connect and interact with the world of DeFi. One of the popular ones, which I also started with, was — Metamask. Today, let’s begin with Metamask.
Note: this password is just used to secure your Metamask wallet on the browser. If you lose your device and don’t have access to your private keys (explained in next step), you can’t access your account with just this password.
Note: Make sure to store these words very safely. Write it down, put it inside your locker or memorise them ALL. Personally, I had textually sent 4 words each to my father, mother and my brother. The point is that these need to be kept safely so you can recover your account if in any case of an incident.
Now you have a Metamask wallet, let’s have a look here, you now have Two Keys — Public and Private Key.
A public key, the one you see on top (as shown in the image below) is used on the blockchain, to track your transactions. Etherscan is a good place to track transactions on ethereum blockchain — go ahead and check the Vitalik Buterin’s (the founder of Ethereum) account (0xd8…6045). You see its all transparent.
Private Key is like a vault code. You can obtain these by clicking on “Export Keys” in the Account Details on your Metamask. You cannot afford to lose this key; they authorise your transactions.
You can export your Private Keys by going into details and clicking on “Export Private Key”, you’ll be asked for your metamask password to access them.
Disclaimer: If you lose your private keys, you will lose access to your account forever. I know it sounds scary, but just store them in safe place. There’s a lot of teams working around to fix this problem via Authentication Models (blog coming up soon).
I like to interact with DeFi while I am on my laptop, but you can also begin by using mobile wallets such as Argent, TrustWallet, CoinbaseWallet, etc.
Take back: Store your 12-word seed phrase and private keys very safely.
There you go, now you have a digital wallet. You just took your first step in interacting with DeFi. Yay!
Due to the epidemic of blockchain technology, there are several blockchains out there. However, when it comes to DeFi, ethereum blockchain is leading because of the value it provides through its smart contracts (which we’ll leave to talk about in another article).
In the DeFi space, it’s about having a smarter and easier way to carry out financial operations.
DeFi is about recreating finance in a smarter and easier way, which is why right now ETH is the most used asset in the DeFi space, because of the value it provides with its ability to write smart contracts, which can be used for pretty much everything. In our case, for now, it will be used as collateral to take out a loan.
I had gathered some DAI initially via freelancing work, and then traded it for 1 ETH on KyberSwap in late 2018, to begin my investment but I know not a lot of people start with DAI.
You need an exchange account to buy Ethereum like Coinbase or Binance. Remember, some of these services will ask you for your bank details, so make sure you go ahead with legit websites. You can also buy crypto using fiat in a peer to peer fashion using websites like localCryptos.
Fiat = Regular Currency like USD, AUD, INR etc.
Otherwise, when you click “Deposit” in Metamask extension, it also shows you a few options to get ETH.
Getting some ETH shouldn’t be hard provided how rapidly the world is making cryptos accessible to everyone (mostly!). If you do get stuck at this stage, let me know, and we’ll figure out a way to get you some ETH.
When I took a loan on MakerDAO for the first time, I understood why DeFi was way better than traditional Finance. Here I used InstaDApp to borrow a loan from MakerDAO. I connected to the InstaDApps dashboard instantly and deposited 1 ETH and borrowed 45 DAI against it. Remember: Make sure you have sufficient amount of Eth in your Metamask wallet in order to process the transaction, about $5 worth of Eth should be enough.
As the name DeFi implies, everything works in a decentralized manner, all transactions are managed by publicly available code (known as smart contracts) on Ethereum Blockchain. There are several financial protocols — MakerDAO is one of my favourite ones — it allows you to generate DAI (a USD pegged stablecoin) by collateralising ETH. Does your bank do that? No? Hm.
Visit the InstaDApp’s portal where you can interact with MakerDAO protocol in a completely trustless manner. Make sure you have got the Metamask extension (as discussed in Step 1)- otherwise, it will ask you to download.
WalletConnect is also a good alternative option if you want to connect any web3 mobile wallet like TrustWallet, Argent etc. Now, deposit the amount of ETH; you would like to lock as collateral. Remember, you can only take up to 2/3 of your collateral value as loan.
Generate the amount of DAI, make sure you keep in mind the Debt/Collateral Ratio. For starters, I recommend keeping it below 50% as we’re using MakerDAO here today.
You get liquidated if your ratio goes above 66%.
What getting liquidated’ means here is that if your ratio goes above 66%, your collateral (the ETH you deposited) is automatically sold to pay your debt (the DAI you generated). So if ETH is $100, then I can withdraw~66 DAI as a loan (which is 2/3 of the collateral value in USD).
No banks. No middlemen. No paperwork. Works 24x7x365. Just a few clicks and you got your loan.
Once you’ve generated DAI, you can then supply it on to Compound Finance on InstaDApps portal and begin earning interest in real-time! Right now, at the time of writing, you can earn about 8.4% annually. It’s insane, I know. Centralized organizations such as banks are known to provide only up to 2.5% per year.
Go on to Compound, click on Supply in DAIs box and enter the amount of DAI you want to supply.
InstaDApp will ask you to provide “Allowance” in order to use your DAI. So, once you provide Allowance by confirming on Metamask you’ll be able to deposit DAI and begin earning interest.
After confirming your transaction, you’ll begin earning interest in real-time!
DeFi is transforming the way finance operates in the world today. Being permissionless, fast, secure and transparent, Decentralized Finance is on its journey to replacing the financial hurdles that we face in the world today because of centralized entities.
Isn’t it pretty cool how we can facilitate financial transactions globally without a third party with just the internet?
The adoption of blockchain technology and the spread of crypto-based financial services would shape a new world of Decentralised Finance. This world would be characterised by more extensive global accessibility to financial services, safer transactions, and lower transaction costs.
Decentralised Finance is at a stage where the Internet was. Just like how the internet democratised the world with knowledge, DeFi could help democratise the financial system. You know they say, candles did their job perfectly well, but light bulbs do it better.
It’s time for an evolution.