You will have come across the DeFi crypto trend if you have been following the cryptocurrency trends for 2020. This article is here to help you understand this new DeFi crypto trend and tell you how you can get started!
Bitcoin, Ethereum and other crypto have emerged as a new frontier in technology innovation and opportunity. They first provided a new way to send and receive funds worldwide then it went further by creating a decentralized network to build applications upon.
As the technology over the last decade has matured, several applications have been created that spurned the emergence of a subcategory within the blockchain space; DeFi. Decentralized Finance (DeFi) emerged and it provided an alternative to savings, loans, trading, and more. This is possible due to smart contracts available on blockchains like Ethereum. This movement also gave rise to a whole new category of cryptocurrencies; these are, DeFi crypto coins.
Smart Contracts are self-executing programs embedded into the blockchain. They are executed when certain conditions are met by the parties, and they provide more functionality than just sending or receiving cryptocurrencies. Smart contracts eventually led to the creation of decentralized applications or DApps as we call them. DApps are not built or controlled by a centralized entity or company. The whole concept of DeFi and smart contracts sounds quite futuristic, but DApps are already running on these concepts.
Before we talk about what is DeFi crypto and how to get started, let’s look at a few events that led to the creation of decentralized finances.
Need for DeFi – Current Economic Landscape
The traditional financial market and its institutions is highly centralized. The government issues a currency that fuels our economy and is used for trading, banking services, and more. The central authority has the power to regulate the flow of the currency.
With centralized currency, there are risks involved. If the government prints more currencies to take on a financial crisis, there are chances of inflation. We put our money in banks and financial institutions for savings and often in fixed or recurring deposits. These organizations invest your money in the stock markets and also provide high interest loans. But they return only a small fraction of their earnings as interest to the depositors. In addition centralized financial systems and their human gatekeepers limits the potential, and the efficiency of financial transactions often with red tape, arbitrary fees throughout, and limited support in third world countries.
People have very little control over their money with corporations handling and investing their money and deciding where it flows. All these problems are caused due to centralized currency. The solution is to decentralise.
What is DeFi crypto?
DeFi or Decentralized Finance consists of digital assets, smart contracts, and dApps built on a blockchain. Ethereum is the primary choice for DeFi applications, but other blockchains are available as well such as NEO, Algorand, or EOS.
DeFi provides an open financial system where you can build various financial tools and services. This can be in the form a decentralised deposit or lending platform whereby users can deposit their cryptocurrency or take a loan using cryptocurrency as collateral such as MakerDAO’s Oasis platform. Another popular DeFi application is providing exchange or liquidity services such as UniSwap which is a decentralized exchange, and is governed by the token holders of Uni. In simple terms think of the daily ways you use money to pay, lend, transfer, invest, or exchange and DeFi is all of that except decentralized. Everyday more applications are springing up to replace traditional centralized services. DeFi has become quite popular and its market value has crossed $14 billion USD as of 25 September 2020.
Difference between Traditional Finance and DeFi
There are quite a few differences between traditional finance and DeFi. However, they do share some similarities.
- DeFi operations are not managed by any government, institutions or employees. The platform runs on algorithms written in code and smart contracts. dApps run without any human intervention.
- DeFi provides code transparency, meaning, anyone can understand how dApps or smart contracts work. This helps create a trust between the application and its users.
- dApps can operate globally. This allows people to invest in DeFi irrespective of their geographic location.
- Anyone has the right to create a dApp and anybody can use it. There are no limitations or gatekeepers, you can directly interact with the smart contracts.
- Various DeFi platforms can be combined to work towards a single goal.
How to Get Started with DeFi crypto?
Step 1 – Get a Digital Wallet
When cryptocurrencies were introduced, digital wallets were launched to store them safely. There are multiple digital wallets available online. Choose the best digital wallet based on your needs. You can follow our in-depth guide to wallets here if you need help.
Once you have chosen a digital wallet, you need to set it up. A digital wallet is held together by a pair of keys – private and public keys. The private keys help you authenticate yourself for transactions and let you access your wallet. The public key can be shared with others to receive payments.
Once you have generated a private key, make sure to note it down so that you never forget it. You can also export the private key and store it on your mobile or personal computer.
Your digital wallet can store cryptocurrencies as well as send them to other parties.
Step 2 – Get Ethereum
Once you have set up your digital wallet, you need to get some Ethereum. Most DeFi services are on the Ethereum blockchain as it is very popular second to Bitcoin and has a huge community building on it.
You can get Ethereum in AUD securely on Elbaite, just visit the marketplace and get your Ethereum in minutes, plus just like DeFi, Elbaite does not hold your cryptocurrency.
Step 3 – Try getting a loan
Once you have 1 ETH, use it to take a loan against DAI (USD pegged stablecoin). Using financial protocols such as MakerDAO, you can generate DAI using your ETH. It is recommended that you take a loan for 2/3rd of the collateral value.
If the debt to collateral ratio goes above 66%, it may get liquidated, meaning, your collateral can directly be used to pay the debt.
Step 4 – Earn Interest on your DeFi crypto
Once you have acquired a certain amount of DAI, supply it to Compound Finance and earn interest in real time. The interest rates can be from 8.4% annually, this is way more than the interest provided by centralized banks.
DeFi crypto has the potential to change the way the financial market operates. With decentralized finance, no government or financial institution has control of your money and where it is invested.
However, there are a fair share of risks involved with DeFi as well. A person requires specific knowledge to handle cryptocurrencies and financial tools and cryptocurrencies and digital wallets are susceptible to hackers. If there is any vulnerability in the blockchain code, there are high chances that it may be exploited in the future.
Access to basic financial services is a human right, and DeFi recognizes that. With the help of dApps, anyone can access financial services globally. DeFi also provides safer transactions and lower transaction costs as there is no middleman trying to make money off of you. Similar to how the internet revolutionised the world, DeFi could revolutionise the financial industry.
Elbaite is the DeFi crypto exchange where you can buy and sell all of the popular DeFi crypto currently in the market. Check out the dedicated DeFi page!
Disclaimer: The information on this website is purely for information. Elbaite is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.