Defi investment involves trading on tokens representing Defi network applications or protocols. These tokens are also known as Defi assets which you can buy low and sell high. Defi investment is a hot topic in the crypto space so it is important for beginners to understand what it is before they can venture into investments.
Learn More About Defi: What it is And How it Works
This guide will explain how to get started in Defi investment, the basic things to know, and the best tools to get you started.
What is Defi?
Defi is a short form for Decentralized Finance, which is an automated method of rendering banking and finance services on blockchain-based computer programming. These financial services are completed without the interference or use of any intermediaries or a third party via smart contracts.
What is the Origin of Defi?
The term decentralized finance or Defi originated from a Telegram chat back in 2018. This chat was between Ethereum developers and entrepreneurs including Inje Yeo of Set Protocol, Blake Henderson of 0x, and Brendan Forster of Dharma.
They were brainstorming to decide what they would call their new movement of financial services being built on Ethereum blockchain which could stripe out traditional banking services method. Other options were also considered by the team which include, Open Horizon, Lattice Network, and Open Financial Protocols. Henderson said Defi worked well, as it was termed “Defy”
Three years after that chat, Defi became a business that can enable users with crypto wallets to trade crypto assets, get loans, take insurance, among other things. Defi Total Locked Value, TLV is over $90 billion at press time which represents the collateral locked up in these services.
Decentralization started right from the time Bitcoin was created. It made Bitcoin hard to kill and grew into something bigger when Ethereum came on the scene. While the Bitcoin network was designed to track bitcoin transactions, Ethereum’s blockchain was created to host programs.
Defi seems very exciting because it has taken the concept of decentralization further. It is a turning point in a financial application that enables users to do more than the peer-to-peer transfer of money.
How Does Defi Work?
Defi is a combination of cryptography, finance, and software development, that has improved upon the concept of decentralization. It uses an application through the blockchain technology or Defi protocol to connect users and utilizes cryptocurrency and smart contracts to render services.
Instead of using financial intermediaries and third parties, the smart contract maintains and fulfills the agreement between two parties. It takes the traditional financial services and replaces them with automated services via the smart contract.
Defi platforms allow users to lend or borrow funds from others, speculate on the price movement of a few assets using derivatives. Defi lending is collateral-based this means a user needs to put up collateral to take out a loan. Collateral can be in Ether or any token that powers the platform.
Decentralized exchanges and lending systems use blockchains like the Ethereum networks. The Ethereum network serves as a decentralized computer that software developers can make decentralized applications. The computers that provide networks for the Ethereum are rewarded with Ether.
Developers can build applications on the Ethereum blockchain since the network maintains a shared ledger of digital value. They can program applications on the Etheruem using smart contracts that can create, store and manage digital assets on the blockchain.
The smart contracts or agreements are enabled by the Ethereum blockchain or as an application script that runs as programmed on the Ethereum network.
Why Should Defi Matter to You?
Defi is fascinating, has enabled the birth and development of so many opportunities in the blockchain that can empower users in so many ways. It provides an alternative financial system that can be accessed by anyone and eliminates the need for intermediaries. It minimizes the cost of processing transactions and the trust of central authorities and third parties.
How to Start Defi Investment: Step to Step Guide
If you are excited about the opportunities Defi could afford you, the best thing to do right now is to learn how to turn those opportunities into reality. As a beginner, you need to go through a process in your Defi investment as explained below step by step.
- Prepare a Crypto Wallet
A wallet enables you to store the coin you will use to trade or invest in the Defi protocols. You may use any wallet of your choice but Metamask is a popular choice and it includes access to any exchange where you can trade Defi coin as well as other protocols you can participate.
- Purchase Crypto Coins
Just like you need funds to participate in other types of investment, you need crypto coins to invest in Defi protocols. If your wallet is an exchange, you can purchase crypto through the platform.
Remember, most Defi protocols are built on Ethereum, so you can make things easier by starting with Ethereum coin Ether or ERC-20 tokens.
You can purchase Ether or ERC-20 very easily on Bitifinex, one of the largest crypto exchanges, and get a 6% rebate fee on your sign-up.
- Choose a Protocol
There are different protocols that make Defi so popular, they allow investors to lend, trade, and stake (lock-up) crypto assets for rewards. Participate in liquidity pools where you can receive earnings when trades are made in your pools. You can engage in yield farming that allows you to earn interest when you participate in a loan.
You can interact with a protocol by visiting the website or app, connecting your wallet to allow their platform to access your crypto coin. Follow the getting started instructions to start trading, yield farming, or any other thing you want to do.
- Track Your Defi Investments
Tracking is important when it comes to crypto investment. Your Defi investment will not be complete if you don’t track your portfolio.
The best tool to start tracking your Defi investment is CryptoView. It is suitable for both newbie and advanced traders, offers the best cryptocurrency trading tools to manage your portfolio. It utilizes a booming local IT sector that produces the best developers and designers in Europe.
CryptoView offers 30 days of free trials if you sign up now to use this wonderful tool. Tracking your Defi investment is as important as starting the investment, as a beginner, you need this tracking to manage and monitor your investment.
Defi made cryptocurrency investment more exciting revolutionalizing the traditional financial services. Investors can lend, trade, and stake funds without the interference and monopoly of the central authorities and financial intermediaries. If you are a beginner, following the above steps and using the recommended tools will help up get moving in your investment. But more important is the fact that you will be able to understand what Defi is and how it works with the information provided in this guide.