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Decentralized finance (Defi)

By Christopher Dy

Disclaimer: Please note that the opinions expressed by the author in this article do not constitute financial advice and are solely for educational purposes only. When buying shares, the value of your investment may go down as well as up and you may get back less than you invest.


Traditionally, governments and financial institutions have always had influence on individual wealth, and often not for the good of such individuals. Governments reduce the value of money through inflation by the use of quantitative easing, and banks hold our money in exchange for just a fraction of a per cent in interest. So why not be in control of your own wealth and take full autonomy of your financial wellbeing?


This article aims to help you achieve that by introducing you to decentralized finance (Defi). Defi removes third parties, offering you a suite of financial products and services at a minimised cost. This is all achieved with the power of blockchain.


In my next article I will go through blockchain covering consensus mechanisms, web3.0 and decentralized autonomous organisations (DAOs). I know you’re only reading this to make money ;)


By the end of this article, you will know:

i) How to get started with cryptocurrencies

ii) How to use decentralised applications (DApps) within DeFi

iii) How to keep your cryptocurrency safe


Getting started

To begin with, if you’re in the UK, I recommend using one of three exchanges (apps) to start to deposit and buy cryptocurrency. These are the most common, and they are regulated by the FCA so you don’t need to have security concerns about losing your money. These apps are:


- Crypto.com

- Coinbase

- Binance


Now, I won’t get into the details of the pros and cons, but if you’re an experienced investor or trader then go with Binance. If you have some knowledge of trading then Crypto.com is perfect to expand your knowledge and experience. If you’re completely new, use Coinbase as the user interface is beginner friendly- though try to minimise your transactions as the fees are relatively expensive.


Once you’ve chosen the app you would like to purchase your crypto in, go through know-your-customer (KYC)- this is a regulatory process so businesses know who they’re offering services to- and deposit some fiat currency, i.e. pounds (it may take two to five business days to ensure KYC is approved). You can also buy cryptocurrency directly but depositing makes it easier to understand your outgoings on your bank statement.


Disclaimer: I am no financial advisor. Do not take this as financial advice. Only invest capital that you are willing to lose. Cryptocurrencies are like any other asset and go fluctuate in price.


Now, it’s time to buy some crypto!


Buy some (say £10-£20 worth of) Ethereum (or BNB if you are using Binance/Crypto.com) as this will be used as gas fees for sending crypto on the blockchain. Gas fees are fees paid to the network for processing and verifying the transaction. You may wonder and say why should I when I can send money for free with my bank? Well you’re bank also offers you less than one per cent and declined your mortgage request, so who’s really winning?


You can also decide to purchase your cryptocurrency on the exchange and keep it there. There are several staking rewards that are good yields ranging from two to twelve per cent APR. Though, if you have a higher risk tolerance (like me!), then let’s do something called yield farming.


**NOTE** Yield farming can be risky as rug-pulls can happen (shorting the asset and pulling out liquidity), yields depend on the amount of liquidity in the protocol and assets can fluctuate in price.


Defi DApps

There are several Defi DApps which serve different purposes for finance. These include lending and borrowing protocols, derivatives, and asset management. I will only show one application: yield farming on decentralized exchanges (DEXs). By buying cryptocurrencies on an exchange, a small fee was taken known as the spread (ask-bid) as a service was provided to facilitate the transaction.


You will become the exchange! By providing liquidity to a DEX, you receive a percentage cut whenever someone swaps cryptocurrencies in a pool (e.g. CAKE-BNB).


First, we need to create a MetaMask wallet. This is an Ethereum and Binance-smart-chain (BSC) compatible wallet that will allow you to interact with different Defi protocols. Although you can’t use the exchange as you technically don’t own the coins, the exchange owns its on your behalf. Create a MetaMask wallet by downloading the chrome extension. There are guides on YouTube on how to do this (it takes less than five minutes). Remember to write down your mnemonic phrase in order so you have access to your private keys.


Then, we need to send coins from the exchange to MetaMask on the SAME blockchain network.




Now you’re all set up, withdraw ETH or BNB (or any cryptocurrency of your choice) to your MetaMask wallet. Exchanges have a withdraw (send) option for each cryptocurrency. On the top right of MetaMask we see Smart Chain (BSC). Cryptocurrencies on BSC are in the form of BEP20. For the Ethereum network these come in the form ERC20.


You can copy the address in the middle (twenty-five to thirty-two alphanumeric characters) and paste it to the withdrawal address within the exchange. The exchange usually recognises the blockchain you’re sending it on. To ensure this is correct, when you are sending the cryptocurrency, check the network you are sending it on matches the network on MetaMask. For example, if I’m sending a BEP20 token, I will copy and paste the address from the BSC on MetaMask. If I’m sending an ERC20 token, switch the network to Ethereum Mainnet, then copy and past the address to the exchange. BSC is cheaper and faster than Ethereum so I encourage you to stick with BNB. MetaMask can also support other layer 1 protocols by adding the Network to your wallet.


We will be using a simple DEX called pancake swap and provide liquidity to the BNB-CAKE pool. We need to have an equal weight of BNB coins to CAKE coins. This means for £100 worth of BNB we need to have £100 worth of CAKE to provide liquidity to this farm.




We need to first exchange some BNB for CAKE. For example, if you have £100 worth of BNB, swap fifty per cent of your holding for CAKE. This should lead to a stake of BNB worth £50 and a stake of CAKE worth £50. You can then add liquidity by receiving LP (liquidity-provider) tokens to stake (deposit) onto farms and earn interest every time someone needs to swap BNB-CAKE. Bear in mind that APRs fluctuate with the amount of CAKE-BNB in the farm and the price of CAKE. You will see the amount of CAKE earned over time and can sell this CAKE for fiat currency, usually tether (USDT) – a dollar stablecoin.


Congratulations, you are now receiving some passive income! Remember that your rewards are given in the form of CAKE and this cryptocurrency can fluctuate in price. To expand your knowledge further you can learn more Defi projects on https://defillama.com/ and https://defipulse.com/. To keep up with cryptocurrency prices use https://www.coingecko.com/en or https://coinmarketcap.com/. If you want in-depth reports and exclusive insights within cryptocurrency, a great resource would be Messari.io.


Custodial and non-custodial wallets: some final notes

Keeping your money on an exchange is like keeping money in the bank, it’s usually safe but you can never be certain your money will always be there. A cybersecurity breach or financial distress could lead to a loss of funds. These exchanges are non-custodial meaning you do not own the private keys (access to your cryptocurrency) since the exchange has them.


When you opened a MetaMask wallet, you noted your mnemonic phrase which ensures you own your cryptocurrency. This is better than holding cryptocurrency on an exchange but if you kept the phrase on a digital device, it may be susceptible to hacking. This is why I recommend using a hardware ledger (physical wallet) to hold your cryptocurrencies as someone would need your physical ledger as well as your mnemonic phrase to have access to your cryptocurrencies.


Resources:

https://crypto.com/

https://www.binance.com/en

https://www.coinbase.com/

https://messari.io/


Get in touch with me at: https://www.linkedin.com/in/christopher-d-928068113