Starting With DeFi: A Beginner's Guide To Entering Decentralized Finance

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Bittime  - Decentralized finance (DeFi) is a part of the cryptocurrency world that focuses on offering financial services in a decentralized manner. It includes various financial services developed by programmers that are accessible to anyone. These services are different from centralized options because they are managed by groups of people through decentralized organizations, giving users more control over their money.

DeFi is a hub of innovation with new decentralized financial services added regularly. Anyone, from anywhere in the world, can use these services.

As per World Bank data from 2017, around 1.7 billion adults globally did not have bank accounts. DeFi protocols provide financial services without any prerequisites, allowing anyone to access them. The primary requirement is knowledge.

DeFi operates on public distributed networks and utilizes self-executing agreements called smart contracts, ensuring equal access to financial services.

How to Utilize DeFi Protocols?

Most DeFi protocols operate on networks like Ethereum or Binance Smart Chain, and the number of blockchain networks supporting smart contracts is increasing. Before using DeFi services, it's crucial to choose a network.

Many major protocols support multiple blockchains, differing mainly in ease of use and transaction fees. Networks like Ethereum, Binance Smart Chain, and Polygon can be accessed through wallet extensions like MetaMask, with only a few settings needing adjustment to switch networks.

Wallet Extensions

These wallet extensions enable users to access their funds directly through their browsers. They are installed like any other extension and typically require users to import an existing wallet or create a new one. They also offer mobile apps for convenience, allowing users to synchronize their wallets across devices.

Additionally, these wallets often integrate the WalletConnect protocol, enabling users to connect their wallets to DeFi applications on desktop devices by scanning a QR code with their phones.

It's essential to note that DeFi is an experimental space with associated risks like scams and fraudulent projects. Conduct thorough research before investing your money.

To enhance security, check if projects have undergone audits. Searching for the project's name followed by "audits" can reveal this information.

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Purchasing Cryptocurrency

DeFi applications require native tokens from specific networks, like Ethereum (ETH) or Binance Coin (BNB), for transactions. These tokens can be purchased on centralized exchanges.

After buying the tokens, they need to be transferred to a wallet that supports the respective network. Be cautious to avoid sending funds to the wrong network.

Some exchanges allow users to withdraw tokens to different networks, facilitating their use in DeFi.

Using DeFi Services

After selecting an application and funding a wallet, users can begin using DeFi services. These services include trading on decentralized exchanges (DEXs), providing liquidity to earn fees, or participating in lending protocols.

Users can connect their wallets to DeFi protocols via the protocol's website, enabling them to access various services. This connection process may involve enabling specific tokens and incurring small fees.

It's crucial to understand that while DeFi offers various services, the sector is complex, and strategies to enhance yields can be intricate. Users should be cautious and stay informed about potential risks.

The primary advantage of DeFi is its trustless nature, allowing anyone to review the smart contracts powering these protocols. However, users must understand the services offered by DeFi before engaging with them.

Lending

DeFi platforms aim to simplify lending and borrowing cryptocurrencies without intermediaries. Interest rates fluctuate based on supply and demand. Borrowers usually need to provide more collateral than the loan amount to ensure lenders are repaid, especially during market volatility.

Imagine someone needs $1,000 but doesn't want to sell their Bitcoin or Ethereum. With DeFi lending, they can deposit, say, $1,500 worth of BTC into a protocol and borrow $1,000 in a stablecoin. They fulfill their obligation without losing their BTC exposure and repay the loan later with added interest.

If BTC's price drops and their collateral value falls to $1,000, the DeFi protocol automatically sells the coins to repay the lender. If BTC's price rises during repayment, the strategy pays off since they retain their exposure.

Liquidity Mining and Yield Farming

Decentralized exchanges (DEXs) are key DeFi platforms. Instead of order books, they use automated market makers (AMMs) through smart contracts.

AMMs replace order books with pre-funded liquidity pools provided by users, who earn fees from trades on those pairs. This process, known as liquidity mining, lets users earn by supplying liquidity.

Liquidity mining carries risks like impermanent loss. This occurs when liquidity providers deposit assets into a pool and one asset's value drops while the other rises, causing a temporary loss.

Yield farming often involves receiving governance tokens from DeFi protocols for interacting with them, like Compound's COMP token. These tokens are distributed to users over time, encouraging participation.

Asset Management

DeFi asset management platforms help users monitor, deploy, and manage their capital efficiently. When users deposit funds, they receive tokens representing their positions, like compound tokens (cTokens) or liquidity provider tokens (lpTokens).

These tokens can be redeemed for the initial investment. For instance, depositing 100 DAI might yield 100 cDAI tokens. Asset management platforms simplify managing multiple positions across DeFi protocols and executing complex strategies.

Safety Measures

The DeFi sector is growing rapidly, attracting both innovation and malicious actors. Before using a DeFi application, ensure it has been audited. Additionally, consider factors like the project team's transparency, community engagement, and risks associated with high annual percentage yields (APYs).

Projects like DeFi Score help quantify risks in DeFi lending protocols, aiding users in assessing their risk tolerance.

How To Buy Crypto With Bittime

You can buy and sell crypto assets in an easy and safe way via Bittime . Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti. 

To be able to buy crypto assets on Bittime, make sure you have registered and completed identity verification. Apart from that, also make sure that you have sufficient balance by depositing some funds into your wallet. For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application. 

Monitor price chart movements of Bitcoin (BTC), Ethereum (ETH), Solana (SOL) and other cryptos to find out today's crypto market trends in real-time on Bittime.

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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.