April 20, 2023
Decentralized Finance, or DeFi, has recently made headlines in the financial sector. It is a financial system based on blockchain technology that allows users to lend, borrow, trade, and invest without the use of intermediaries such as banks or financial institutions. More people are eager to invest in DeFi as it grows in popularity.
But how do you get started with DeFi? We'll walk you through the procedure step by step in this article.
To understand DeFi, you must first grasp what it is not. Traditional finance is centralized, which means that banks and financial organizations act as intermediaries and execute transactions between them. Let's say you want to buy a stock, you need to ask your bank to buy on your behalf. The bank will execute the operation and buy the stocks in the market for you, charging you a lot of fees on the way.
Another example can be money transmission, for you to send money to another person, the bank processes it on your behalf and can block it or charge heavy fees if it is an international transaction.
DeFi, on the other hand, is decentralized, which means it functions on a blockchain network without the use of intermediaries. This increases the transparency, security, and accessibility of DeFi to anyone with an internet connection.
Basically you can convert stablecoins (which is the representation of money in the blockchain) directly into any virtual asset on the blockchain.
In another example, if you want to send money to another person you can send it in seconds without any constraints (please note that you still need to pay gas fees)
The following are some of the benefits of using DeFi:
Transparency: Because DeFi is decentralized, it is more visible and available to everyone, meaning that you can see every transaction in the so-called blockexplorers. In comparison to centralized financial services, these last ones are very opaque which led to several banking crises.
Investing in DeFi carries risks, just like any other investment. Here are some of the dangers you should be aware of:
Smart Contract Risk: Smart contracts are self-executing contracts that enforce the terms of an agreement automatically. A flaw or error in the code might result in severe financial losses. In other words, these smart contracts are pieces of code that process the transactions. If a DeFi product is built using this technology, always make sure that they have at least 2 audits from reputable auditors. It is not uncommon that these smart contracts get hacked and users' funds get stolen. This usually happens with young products which have not been time tested.
Now that you know what DeFi is and the risks it entails, here are the actions you must follow to invest in DeFi:
You'll need a decentralized wallet that supports the blockchain you are trying to access.. MetaMask, Trust Wallet, and MyEtherWallet are popular solutions.
Gas is basically a fee that you have to pay to perform a transaction on the blockchain.
Because the majority of DeFi applications are built on the Ethereum blockchain, you'll need to purchase Ether (ETH) to invest in DeFi. ETH can be purchased on cryptocurrency platforms such as Lympid, Coinbase, Binance, and Kraken.
If you are using other chains such as BNB chain or Polygon you will need to buy the respective gas tokens.
There are numerous DeFi products available, including Uniswap, Aave, and Compound. Conduct your research and select a platform that meets your investing objectives and risk tolerance.
For example, Aave has been active for a long time and always working perfectly. Aave is a money lending market and this means that you can borrow money by giving collateral or lend money and win passive income (between 1% - 10% APY).
If you do not want to do all of these steps but you still want to reap the benefits of DeFi products you can create an account with Lympid. Deposit EUR and choose a curated marketplace of DeFI products. With 2 clicks of a button you will be investing in reliable DeFi protocols.
Investing in DeFi can be exciting and profitable, however it is critical to recognize the dangers involved. By following the instructions in this guide, you are ready to take the necessary precautions to safeguard your investment!
