DeFi (decentralized finance) has today become an ever larger and more developed universe. We can get lost very quickly, especially if we haven't kept up with developments. There are different disparate components (meaning different applications and services) within the challenge and this is perhaps what makes its definition less obvious to understand.
This is why we decided to make an ultimate beginner's guide to understanding DeFi. Here we will show you how to take your first steps in this universe which may seem nebulous at first glance.
However, knowing how to use the challenge is, to put it another way, “becoming your own bank”. It's honestly a golden skill and I'm not telling you this to push you to follow this guide. Honestly, it's a godsend and you'll find out for yourself.
See the video version from the DeFi beginner's guide (the basics to understand)
No more introduction, let's get going now.
Understanding the difference between CeFi and DeFi
When we talk about DeFi, we are talking about decentralized finance, as opposed to centralized finance (classic or traditional). Decentralized finance therefore works in the idea of blockchain technology and “before” finance does not.
The big difference between the two (because basically they have the same principles) is that one is decentralized (the fundamental characteristic of blockchain technology) and the other is not.
So, to better understand the Challenge, it is above all to understand the idea of decentralization. There's no need to rack your brains about this, just understand that there is no central entity (or vertical hierarchy) that will manage the operation of a service. This is really what should be understood by “centralized” and “decentralized”.
🤓 The term “decentralized” simply refers to the idea that the service is based on a system established on a blockchain where all parties are at the same level of control. There is not one person, one group, one leader who will make decisions or manage the protocol. (I will explain better later on the concept of decentralization, because there would be other things to say in detail).
This is the first simple definition of the thing.
But it's not over. To understand the Challenge even better, you must understand the distinction between certain sites. Just because a site allows you to buy crypto does not mean it is a decentralized site.
You know, when you buy bitcoin or another cryptocurrency on a decentralized site (like Binance, for example or BitPanda) via a bank card, you are on a site which certainly deals with cryptocurrencies, but which is said to be centralized.
You may be wondering at this point how we recognize the two types of sites? Well, generally, if you do not have access to your private key and the site asks you for an email, there is a good chance that it is a centralized site. This means that it is the site (and therefore, the company that manages the site, with a hierarchy and employees) which will control your assets. The word “control” is not suspicious here. It's just that it's a simple service for purchasing cryptocurrency that is done on a centralized site.
Centralized services do not work directly on the blockchain but are entities that offer us products linked to it.
We all need to use centralized sites because they are simply sites that legally reduce our burden. For example, on decentralized sites, you could not buy crypto by bank card (because the bank card is linked) to a traditional bank and the means of acceptance require being a legally registered company in a country.
Before the appearance of bank cards to buy cryptos, we obtained cryptos by mining or by trading on certain peer-to-peer exchange sites.
To find out more, you can read the article on difference between CeFi and DeFi.
This is done in several simple steps. I have chosen here, for the sake of simplicity, a simple route to follow. There are other small detours you can take. But, maybe try the detours once you have a good understanding of the most used path.
Typically, in the most used path, users follow this simple route before it “diversifies” and becomes more complex. Over time, you will see that you too will discover new apps etc. and do increasingly “complicated” things.
These are the 5 steps that we will address here, the shortest path to DeFi.
For a better understanding, I will also explain essential terms. If sometimes certain terms are not understood. Take notes to come back to certain points later.
First step: Register on a site to buy Ethereum
Obviously the very first step is to obtain cryptos and more precisely Ethereum.
Why Ethereum? Well, it was the very first blockchain that offered us decentralized applications.
In fact, to summarize, doing DeFi simply means using decentralized applications on blockchains. Due to its age, it is on Ethereum that we have the most possible applications.
You should know that there are more and more blockchains that offer the same operation and this is also what we are going to see, don't worry.
So, we simply need to go to a site to buy cryptos. For beginners, I advise you to go to a simple site at the beginning like BitPanda.
Of all the sites I have used, I must admit that this is the one I find the best designed. In short, you go to the site and buy ETH by bank card.
This will certainly depend on your allocated budget, but the ideal to start would be $100. What will interest us here is rather to see how DeFi works. Of course, and depending on your objectives, you can (once you understand the process) go there free with larger sums.
Second step: Open your decentralized wallet (MetaMask).
Here we start to get down to business. We are going to create a decentralized wallet. We often take Metamask because it was the first wallet of this type. In addition, it is the most malleable and functional there is. You can again use other wallets later, but it's really better to start with metamask.
–>Download Metamask (read the Metamask tutorial)
You install it and download the extension to your browser. It works perfectly on Chrome and like this, every time you are on a decentralized application, you will be able to immediately connect your wallet to the Dapp.
Once downloaded, this is where you need to create your first account. We will give you a series of words which in fact consists of your private key, the ultimate key to access your wallet. You should not give this list of words to anyone and carefully write them down on a document (even paper) where no one will have access.
Once you have saved your private key, for greater ease, you can simply create a password of your choice to open your wallet.
Here too, it is important to remember this carefully!
The only thing you can post publicly is your public ETH address. In fact, this address represents in some way your IBAN. This is the address you should use to receive cryptos.
Now essential note: There, we are automatically on the Ethereum network which has been preconfigured on Metamask. You can therefore send tokens designed to be supported on the Ethereum network to your wallet at this time. In fact, you will be able to send tokens of type ERC-20 on your wallet (and even ERC-721 tokens for tokens NFT).
We will then see how to add other networks and use Metamask on other blockchains.
Third step: Send tokens to your wallet.
Obviously, you now need to “feed” your wallet. You can send yourself ETH or ERC-20 tokens that you purchased on centralized sites like BitPanda or Binance, for example.
Your public address visible on your Metamask wallet is the one you must use to receive your tokens.
It is also the one that you can communicate because this is where we will send you tokens.
Of course, I repeat it again here: only disclose your public key and NEVER that of your private key!
You need to understand that your public ETH address is the same for all the ETH tokens you will have. Indeed, on centralized sites, each token has its own address of course, but on DeFi and on Metamask, it is different.
Your ETH address is the same for all other tokens on the Ethereum network.
That said, for better use, you can/should add the token addresses so that they are listed on your wallet.
Step Four: Add tokens to your wallet.
To add tokens, go to your wallet and click on the “Asset” tab which is to the left of the “Activity” tab.
Scroll down the list to the end and click on “Add token”. There you will need to add the address of the token.
To find out the address, you have the famous sites like Coinmarketcap and Coingecko to obtain this information.
Do you see the icon with the fox? This is where you can copy and paste the address and add it directly to your wallet.
You can add different tokens to your wallet. Only add tokens you know! Always check the source and only trust recognized sites like Coingecko and Coinmarketcap.
There are plenty of scams with copies of tokens with false addresses, seriously check the sources.
Final step: Discover decentralized applications
You see? Not complicated in the end? From there you can approach DeFi, and you can use services on Ethereum.
However, be careful, we have only just seen how your wallet works.
You are not yet “ready” to use any application! Read articles, watch tutorials and learn about Dapps before using them.
To discover interesting applications, you can go to sites like Defillama ou DappRadar to know the latest trends or better analyze the Dapps that work.
Among the most popular projects, we find different types of applications:
- Lending (loan) services with Aave, Maker and Compound to give the best known. You can borrow or lend cryptocurrencies and receive interest.
- There are also DEXs (Decentralized Platforms) like Uniswap to be able to exchange and use any token from the same network.
- The possibility of doing liquidity mining by adding liquidity.
- The NFT games and play to earn games
There are plenty of things to do in DeFi. This is the subject of our next article on the subject.
The ecosystem is indeed booming and you may find yourself overwhelmed with all the options available to you.
Something else important to clarify now.
We have only told you about the Ethereum network for the moment. For what? Because it all started with Ethereum and today, most DeFi protocols are hosted on Ethereum.
Since then, the ecosystem has grown and other networks have emerged. For example, Binance smart chain is very popular with beginners. Its success is also partly explained by the fact that the Ethereum network is expensive…for the moment.
There are certainly alternative solutions like Optimism or even Polygon. You can read the tutorial article on this subject for add Matic to your metamask.
Final note: This is the first part of this mini-training. There are details that have not been mentioned here because it seems to us that it would make the learning more difficult. That said, you will see that quite naturally, your knowledge will form a kind of puzzle and put everything back in order.
Now, keep in mind that the DeFi universe is still an experimental space. There are risks and a lot of scams. We discover vulnerabilities almost every day in smart contracts...Take the time to inform yourself before investing in anything.
By taking the time, you will discover great applications to invest like a king ;).
Here is the sketchnote sent to us by a cryptocurrency enthusiast ;). We appreciated his work and the general aesthetic of his paper. Here it is here:
See you soon for part 2!
See the video beginner DeFi training part 1 on Youtube:
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