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).

How to create DeFi wallets

The decentralized finance revolution through DeFi is in the process of eliminating traditional banking systems along with financial intermediaries. The control users enjoy over their funds through DeFi wallets provides complete transparency and security.

These wallets serve as digital storage platforms which let users manage their cryptocurrencies by sending and receiving transactions independently from central authority control. The following guide provides all essential information about DeFi wallet setup and usage.

Choosing a Wallet

There are two major types of DeFi wallets which are software wallets together with hardware wallets. People base their wallet selection on security features together with user convenience and extended storage requirements.

Software Wallets (Hot Wallets)

The digital wallet known as a software wallet enables users to access their cryptocurrency through smartphones and computers and browser extensions. The internet connection of these wallets provides user convenience yet exposes them to possible hacker threats. Popular software wallets include the following options among others:

MetaMask

People use MetaMask as their primary decentralized finance wallet. Users can easily interact with Ethereum-based decentralized applications (dApps) through the wallet since it supports both ERC-20 and ERC-721 tokens. MetaMask operates independently from Bitcoin (BTC) and other blockchain networks thus users need separate connection bridges.

A mobile application and browser extension form the core features of this wallet. Meta mask also supports Ethereum-based tokens. and one do not have to worry because it requires a strong password making it impossible for anyone to get into and recovery phrase in case you misplace your phone.

Trust Wallet

Trust Wallet stands as a popular choice among cryptocurrency wallets because it includes a built-in decentralized exchange (DEX) system. Users can perform token swapping across different chains through its DEX functionality.

Trust Wallet enables users to connect with Ethereum, Binance Smart Chain and Solana blockchains among others.

Users only need to pay gas fees to execute transactions through the wallet since it does not impose any further transaction costs. The device contains private keys which grant users total control of their security.

Argent Wallet

Argent Wallet serves as an Ethereum-based wallet system that delivers easy user experiences to newcomers in DeFi. The wallet system enables users to perform transactions without gas fees and it provides upgraded security features. The wallet offers multiple security layers with an option for social recovery and also supports Assets: Ethereum and ERC-20 tokens. New users seeking an easy start into DeFi will find Argent Wallet an optimal solution.

Coinbase Wallet

Through Coinbase, the company created the non-custodial DeFi wallet Coinbase Wallet. Users operating this wallet can maintain complete authority over their private keys since it functions independently from the main Coinbase application. This wallet system offers NFT support together with DeFi application integration, also user stores their private keys directly on their device.

The platform supports storage of Ethereum along with Bitcoin and other major cryptocurrencies.

Hardware Wallets (Cold Wallets)

Private keys stored in hardware wallets remain protected because they exist offline. These devices stay offline except for the time when users need to perform cryptographic operations.

Ledger Nano S Plus

Ledger Nano S Plus stands out as a widely used hardware wallet that offers excellent price-to-security value. This device supports both storage of multiple cryptocurrencies alongside NFTs. It has a stronger security because private keys stay offline so they become less vulnerable to hacking attacks. This device suits investors who want to keep their assets safe through extended periods of ownership.

Ledger Nano X

The upgraded Nano S Plus model from Ledger features Bluetooth connectivity which enables mobile device usage. It also Supports over 5,500 cryptocurrencies and it is secured through its built-in secure chip. This product suits traders who trade often yet emphasize security in their operations.

Trezor Model T

Trezor operates as a prominent company that produces hardware wallets alongside other providers. The Model T operates through a touchscreen system to make it user-friendly. This also supports thousands of cryptocurrencies and it has a PIN-protected transaction features. The device benefits users with advanced experience who value both ease of use and security.

How to Install or Create a DeFi Wallet

Installing a DeFi wallet is simple. Here's how:

1. Choose Which Wallet to Install: Determine if you prefer a hot wallet (software wallet) for convenience or a cold wallet (hardware wallet) for security.
2. Install the App or Software: For software wallets, download the application to a phone or computer. For hardware wallets, install software that is included.
3. Set Up Your Account: Install it, then follow on-screen instructions to set up the wallet. This involves:
4. Creating a secure password: Creating a recovery seed phrase (store it safely, never share it) and writing it down and filling in identification checks (for software wallets, if required).

Creating a Software Wallet Account

• Launch the wallet application and select "Create New Wallet."
• Create a secure password.
• Write down and store safely your recovery seed phrase (it's your backup in case you lose wallet access).
• Verify your seed phrase by retyping it in order.
• Your wallet is set up to use.

Creating a Hardware Wallet Account

Connect a computer or phone to a hardware wallet.

Use official software provided by the maker to set it up.

Create a PIN to secure your device.

Create a recovery seed phrase (store it safely, never share it) and generate it.

Verify your seed phrase to complete setup.

Then use software provided to manage funds.

Very importantly - Fund Your Wallet

After setting up your wallet, you can deposit money in it by moving cryptocurrency to it, through a Dex or Cex account.

Install DeFi Apps

Use the wallet's browser to access DeFi platforms or scan a QR code to link up.

Create a backup wallet in case you lose wallet access.

Create a backup wallet in case you lose wallet access

Use Cases of DeFi

DeFi encompasses much more than simply creating and using a DeFi wallet. It represents a transformative shift in how we think about finance. Here are some powerful use cases of DeFi.

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 DeFi 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.