How to Use Decentralized Finance (DeFi)

The advent of technology in the financial space has more than ever caused a pivotal change in complex traditional financial activities. Today, there is increased access to financial services in an even more convenient manner than was seen with conventional financial models.

Decentralized Finance, or simply DeFi, is one of such technological evolutions driving changes in the way and manner through which financial transactions are undertaken. DeFi offers easy and direct peer-to-peer transactions in decentralized lending, borrowing, and payments.

In this post, we dive into how you can join the trend on the use of DeFi by showing you how the concept can be used.

What is Decentralized Finance

Decentralized Finance is a financial technology tool that employs blockchain technology and protected circulated ledgers to allow direct peer-to-peer financial transactions among parties.

Understanding Decentralized Finance

In conventional financial practice, there is generally a centralized financial model in which monies are held by banks and regulated by central banks in most countries. 

This centralized financial model is called the middleman theory, in which banks act as middlemen in transactions.

With the DeFi technology, the middleman theory is eliminated, and there is no regulator interfacing between the parties. 

This elimination allows for greater transparency of transactions between parties with no hidden fees; it also allows for an exchange from one end to another without the difficulty of regulatory oversight.

Users of decentralized finance can borrow, trade, lend, and undertake varying financial transactions from any location using software databases that allow them to interact directly. 

Some of the benefits of DeFi include easy accessibility for everyone, irrespective of location, an absence of permission for the processing of transactions, and increased control over users’ finances.

DeFi could be applied in a variety of ways, from decentralized lending and borrowing to yield farming to automated market makers (AMMs).

Setting up a Wallet for Decentralized Finance

DeFi wallets are guided by the basic principle of users “being their own bank,” which allows users to function through a decentralized community when transacting. Here’s all you need to know when selecting a DeFi wallet.

Choosing a Wallet

DeFi wallets can either be software or hardware wallets. Here are some examples and their features.

Software Wallets

Software wallets are digital wallets that can be accessed using smartphones; some of them are listed below:

MetaMask

MetaMasks are DeFi wallets that allow tokens to meet the ERC-721 and ERC-20 standards. It, however, does not support ETHs. 

The wallet is significant for users seeking to store Ethereum dApps. 

MetaMask can be accessed through a mobile application or the web through the internet.

TrustWallet

Another software decentralized wallet is TrustWallet. The TrustWallet comes with an installed decentralized exchange, allowing users to conduct cross-chain swapping with ease. 

Nonetheless, TrustWallet charges fees on transactions.

Hardware Wallets

On the other hand, hardware wallets are physical wallets that can be carried around; they are usually not connected to the internet unless intended. Here are some examples of hardware wallets:

Ledger Nano S Plus

The Ledger Nano S Plus is a hardware device used to store your cryptocurrencies and can be used for decentralized financing. Ledger Nano S Plus also stores non-fungible tokens (NFTs).

Trezor

Another hardware wallet is the Trezor. Users can store their cryptocurrencies and trade while keeping their data anonymous.

How to Create a DeFi Wallet

Follow the procedure below to learn how to create a DeFi Wallet:

Select your Wallet type

The first step to selecting a Defi wallet is to acquire a wallet type. This type could be hardware or software, depending on your choice. 

There are many hardware and software platforms to choose from, as listed above.

Download the Wallet App or Install the software

Depending on the software or hardware you opt to use, you should download the app to your phone or device. 

Downloading would help you track your transactions on your wallet, and it also allows you to access your wallet whenever you want to.

Create an Account

Upon installing the application, you’d have to create an account by submitting the necessary information, including your email, address, and a powerful password. 

Some platforms also require the submission of a government identity card.

Transfer your funds

Once an account has been created, you can have your cryptocurrencies stored in your wallet. To connect your wallet to a dApp, look for a DeFi app you’d like to connect with by tapping the DeFi app icon or placing the URL on search. 

Once in the DeFi app, click the connect icon to have the same link to your wallet. You can also simply scan the QR code in the DeFi application and tap Connect.

Using DeFi Platforms

Decentralized lending and Borrowing

This is perhaps one of the most known uses of DeFi: users can borrow or lend money using decentralized finance technology. This way, the banks and regulators who act as middlemen for lending or borrowing approval are eliminated and therefore fast-track the transaction.

Decentralized Exchanges (DEXs)

This application allows users to get access to decentralized exchanges by interfacing with varying cryptocurrency users on DEX platforms. 

Some examples of decentralized exchange platforms include dYdX, 1inch, PancakeSwap, and SushiSwap. 

Through decentralized exchanges, users can trade using cryptocurrencies for general transactions without the need to transmit their funds to a bank, which acts as an intermediary in handling the transaction.

Yield Farming

Yield farming is also called lending farming. As the name implies, the application allows users to lock their funds in a vault over a period of time and eventually allows the funds to be borrowed by third parties with a resultant gain to the owner of the funds; such a gain is called a yield, hence the name yield farming.

Synthetic Assets and Derivatives

Users can purchase virtual assets and derivatives using DeFi platforms. For instance, NFT’s are popular among DeFi users.

Automated Market Makers (AMMs)

This is an application of decentralized finance that applies the calculation of equations to value assets. 

AMMs often adopt liquidity pools, which traders can deploy in their transactions.

Best Practices and Risk Management

Decentralized finance is an evolving technology that has yet to meet its functioning stability; hence, users should be cautioned when adopting DeFi apps. Here’s all you need to do to stay protected.

a. Conduct due diligence

Be sure to understand the project and all about it before jumping in. be weary of potential risks from rug pulls to smart contract lags and others.

b. Diversify investments

Ensure you diversify your DeFi investments across a large pool of protocols and assets to ensure stable and risk-free use.

c. Understand the fees and costs

Check out a DeFi platform's cost or associated fees before going for it. This essential feature lets you know the exact amount you would be channeling towards your use.

d. Keep Software updated

It is highly essential to keep your software up-to-date to ensure your software is compatible with the current status of the DeFi platform.

Conclusion

Decentralized finance is now, more than ever, becoming the norm, with DeFi platforms becoming easily accessible to the public. 

To understand the benefits of DeFi to finance and, in particular, trade, you would have to explore the platforms firsthand. 

This would see you participating in the development of a new revolution towards decentralization in the financial space.