Strategic Investing: Defi Coins And Your Portfolio

Decentralized finance, or DeFi, is a financial system built on blockchain technology. DeFi is closely related to cryptocurrencies like Bitcoin and Ethereum, but it is not exactly the same. DeFi eliminates the need for traditional banking institutions and instead relies on smart contracts and decentralized applications (DApps).

To invest in DeFi, you'll first need to set up a crypto wallet, such as MetaMask, which also functions as an exchange and browser extension. You'll then need to purchase your DeFi coins. Most protocols exist on Ethereum, so you'll likely be purchasing Ether coins or ERC-20 tokens.

Once you have your crypto wallet and coins, you can participate in the DeFi protocol of your choice. One common use for DeFi is lending and borrowing assets. For example, you can lend out your crypto and earn interest, or borrow assets by putting up collateral.

It's important to note that DeFi is largely unregulated and not insured like traditional banks. As with any investment, there are risks involved, and it's recommended that investors do their research before getting involved.

Choosing a crypto wallet

Crypto wallets are a way to protect the secret information that gives you control over your digital assets. They come in many forms, but at their core, all crypto wallets provide a way to protect the secret information that gives you control over your digital assets.

When choosing a crypto wallet, it's important to consider what you plan to do with your cryptocurrency. If you're interested in the NFT market, choose a wallet that can connect to NFT marketplaces such as OpenSea, SuperRare, and Solanart. For example, if you're using Solanart, which relies on the Solana blockchain, you'd probably want to choose a wallet commonly used by Solana cryptocurrency holders, such as Phantom, Solflare, or Sollet.

On the other hand, if you don't care about NFTs and just want a place to store or send and receive cryptocurrency, Coinbase, Trust Wallet, Atomic, and Exodus are good options.

Another thing to consider is whether there's a mobile app version of the wallet. Some wallets are intended for desktop computers as a browser extension and may not be as mobile-friendly as you'd like.

If security is your top priority, you might want to consider a hardware crypto wallet, which comes in the form of a USB stick that can be disconnected from your system and the internet for added security. Examples of popular hardware crypto wallets include Trezor and Ledger Nano X.

• MetaMask: A popular wallet, exchange, and browser extension that supports Ethereum. It can connect users to different DeFi protocols, making it widely used among DeFi investors.
• Coinbase Wallet: A separate product from the Coinbase exchange, allowing users to store cryptocurrency themselves. It easily integrates with the Coinbase exchange and may be a good choice for those new to non-custodial wallets.
• Trust Wallet: The official wallet of Binance, allowing users to buy, sell, and trade directly from their wallet. It claims to support more than 10 million types of digital assets and over 100 blockchains.
• Crypto.com DeFi Wallet: Created by a company known for its crypto exchanges, this wallet is tailored for decentralized finance (DeFi). It allows users to interact with DeFi products on their mobile app and in a browser extension.
• Ledger: One of the best-known names in crypto wallets, offering integrations with popular software wallets such as Crypto.com and Guarda. It provides a mobile app, a desktop app, and a browser extension.
• Trezor: Offers high-end hardware and integrations with other crypto firms. It has a desktop and mobile app and provides built-in services such as staking and crypto purchases.

When choosing a crypto wallet, it's also important to consider the level of security, ease of use, and whether it supports the cryptocurrencies and blockchains you need. Additionally, consider the fees associated with transferring money and digital goods, as some blockchains, like Ethereum, are known for high "gas fees."

Purchasing DeFi coins

DeFi, or Decentralized Finance, is a financial system built on blockchain technology. It allows for peer-to-peer transactions without the need for traditional banking institutions. DeFi offers users greater autonomy, transparency, and financial inclusion, with opportunities for borrowing, lending, and trading.

To purchase DeFi coins, you will need to follow these steps:

• Set up a Crypto Wallet: Choose a crypto wallet that supports DeFi coins and tokens. Some popular options include MetaMask, Trust Wallet, and the Binance Chain Wallet. Your wallet will allow you to store, send, and receive DeFi coins.
• Purchase DeFi Coins: You will need to invest in the coins that align with the DeFi protocol you want to participate in. Most protocols are built on Ethereum, so you will likely purchase Ether coins or ERC-20 tokens. You can buy these coins on cryptocurrency exchanges like Binance or directly through your wallet.
• Connect Your Wallet: To utilize your DeFi coins, you will need to connect your wallet to a DeFi platform or protocol. Ensure that your wallet is compatible with the DeFi protocols you want to interact with.
• Participate in DeFi Activities: Once your wallet is connected, you can start participating in various DeFi activities, such as lending, borrowing, staking, or trading. Different DeFi platforms and protocols will offer different services and opportunities.

It is important to note that investing in DeFi coins carries risks. The DeFi space is still evolving, and there may be regulatory, security, and stability concerns. Always conduct thorough research and understand the risks before investing.

Understanding decentralised apps (DApps)

Decentralised applications, or DApps, are software programs that run on a blockchain or peer-to-peer (P2P) network of computers instead of a single computer or server. They are built on blockchain technology and use cryptocurrency as a means of exchange. DApps are designed to be open-source, transparent, and resistant to censorship.

DApps are controlled by a community of users, not by a single company or individual. This makes them harder to censor, and they offer greater privacy and security. They are also community-driven, encouraging innovation.

DApps are typically built on the Ethereum platform, though other blockchains such as Cardano are also used. They are developed for specific purposes in the blockchain space, such as DeFi, gaming, and marketplaces.

DApps have a range of uses, including:

• Financial services: Facilitating peer-to-peer transactions, such as currency exchanges or asset transfers.
• Supply chain management: Tracking the movement of goods to ensure transparency and accountability.
• Identity verification: Securely storing and verifying identity information.
• Real estate: Facilitating transactions and tracking property ownership.
• Healthcare: Storing and tracking medical records and facilitating communication between healthcare professionals.
• Education: Creating decentralised learning platforms for direct interaction between students and teachers.

DApps have the potential to disrupt traditional industries by allowing for peer-to-peer interactions without a central authority. However, they also come with challenges, such as the need for regulatory evolution, development complexity, and user interface issues.

To summarise, DApps offer a decentralised, secure, and transparent way to interact with blockchain technology, providing users with greater control over their data and assets.

Using a decentralised exchange (DEX)

Decentralized exchanges (DEXs) are a type of cryptocurrency exchange that allows for direct peer-to-peer or Automated Market Maker (AMM) liquidity pool cryptocurrency transactions without the need for an intermediary. This lack of intermediaries differentiates DEXs from centralized exchanges (CEXs).

In transactions made through decentralized exchanges, the typical third-party entities that would normally oversee the security and transfer of assets (e.g. banks, stockbrokers, online payment gateways, government institutions, etc.) are replaced by a blockchain or distributed ledger. Some common methods of operation include the use of smart contracts or order book relaying, although many other variations are possible, with differing degrees of decentralization.

DEXs are built on the multi-layered DeFi architecture, which includes the Settlement layer, Asset layer, Protocol layer, and Application layer. One example of a DEX is Uniswap, which is a decentralized exchange set up to trade tokens issued on Ethereum. Users can trade any Ethereum-based token or earn money by adding liquidity to a token's market.

• First, send your ETH, which you have already purchased from Binance, to Uniswap.
• To do that, connect a wallet. A popular choice is MetaMask, a browser wallet that is compatible with most DeFi applications.
• Once you're all set up, send some Ethereum to your MetaMask address from wherever you're holding your ETH.
• With what remains of your ETH in hand, transfer it to the token you want to purchase.
• For example, to exchange ETH for DAI, a decentralized stablecoin, click "swap" and select ETH and DAI from the list.
• Pay liquidity providers a small fee. In this case, Uniswap has determined that the cheapest way to make this transaction happen is to swap from ETH to WETH to COMP to MKR to DAI.
• Confirm the transaction.
• Your purchase of DAI will be confirmed on the blockchain and ready for use.

It is important to note that using decentralized exchanges like Uniswap can be costly due to high "gas fees." In the example above, it cost $25 to transfer $0.12 worth of ETH to DAI.

Borrowing and lending

In traditional finance, lenders provide borrowers with funds, and borrowers pay back the borrowed amount with interest. This process is facilitated by financial institutions such as banks or peer-to-peer lenders, which control access and rates. In the CeFi (centralised finance) crypto space, this is done by centralized platforms such as BlockFi and Celsius. These platforms take custody of the depositor's assets and pay a low but safer rate of return.

DeFi, on the other hand, allows any user to become a borrower or lender without having to hand over personal information, undergo KYC procedures, or give up custody of their funds. This is done through smart contracts on open-source blockchains, predominantly Ethereum. Lenders can deposit their coins into a DeFi protocol-based smart contract and will get newly minted tokens native to the protocol, such as aTokens for Aave, cTokens for Compound, or Dai for MakerDao. These tokens represent principal and interest in token form and can be redeemed at any time.

Borrowers can choose to borrow from one of these protocols and put down collateral worth more than the amount they wish to borrow. This over-collateralization is a key feature of DeFi borrowing and lending. While it might seem counter-intuitive, there are several reasons for this. Borrowers may need to cover unforeseen expenses, avoid forced liquidation of crypto holdings that are set to increase in value, leverage exposure to a crypto asset for speculation, or avoid capital gains tax.

There is a limit to how much can be borrowed, which is determined by two factors: the amount deposited by lenders in the protocol's funding pool, and the "collateral factor" of the coins put down as collateral by the borrower. The higher the quality of the collateral, the higher the amount that can be borrowed. For example, if Ether (ETH) has a 75% collateral factor and 10 ETH is put down as collateral, the borrower can borrow up to 7.5 ETH.

Aave is one of the most popular DeFi platforms. It is built on the Ethereum blockchain and facilitates peer-to-peer lending via smart contracts. Aave offers stable APY, which can be considered fixed in the short term, and flash loans, which do not require collateral.

While DeFi borrowing and lending offer some advantages over traditional finance, there are also risks involved. These include smart contract tampering and the risk of borrow APYs rising dramatically within a short time period. Users must also be cautious with wallet addresses, as sending money to the wrong wallet means funds are lost forever.

Frequently asked questions