Oct 19, 2023
Defi is one of the aspects of cryptocurrency that lets you earn passive income. Through DeFi, you can make money with your crypto without relying on the market price.
Of course, at Bridge Trust, we have strong opinions here but before we do that we want to make sure to cover the basics.
Brief Overview of Decentralized Finance (Defi)
Of course, before you fall down the rabbit hole of Defi, you should understand the basic principles of this brand-new financial system.
Defi or Decentralized Finance is a groundbreaking financial technology that uses securely distributed ledgers, like the ones used in cryptocurrency.
Compared to traditional finance, which uses financial institutions like the bank and the government, Defi gives you total control over your money.
In short, it removes third parties and other centralized institutions from the equation, creating a smoother system for financial transactions everyone can participate in.
This opportunity opens up fresh possibilities for anyone who wants to earn using cryptocurrency.
Defi Safety: How Does Defi Work?
Three primary components make Defi work and safe for users. These components are stablecoins, blockchain technology, and smart contracts.
What Are Stablecoins?
Stablecoins are the center of every Defi transaction. It’s the bridge connecting decentralized exchanges to centralized exchanges.
Simply put, stablecoins are the cryptocurrency tokens used in Defi systems. But these digital currencies match real-world assets.
Tether, Dai, and USD coins are examples of stablecoins. We label these digital currencies as such because their values are tied to the US dollar.
What are Blockchains?
As mentioned earlier, Decentralized Finance uses a secure distribution of ledgers like cryptocurrencies. And a database of these distributed ledgers is what we call a blockchain.
Basically, Defi records all transactions in blocks accounted for by the users. If every user agrees to verify a transaction, the system closes that block and creates another block with information from the previous block.
Decentralized applications, or dApps, run the blockchain network. These apps are transparent, secure, and censor-resistant, allowing users to transact directly.
What Are Smart Contracts?
Smart contracts refer to scripts or codes that execute agreements between users. These scripts are written into the blockchain, automating the transaction process.
A simple example of a smart contract is a person purchasing an item in a store. However, the person won’t need to pay or collect the item in person as the system automatically handles it.
Like blockchain technology, smart contracts are efficient, secure, and unalterable. Bitcoin and Ethereum are examples of blockchains with built-in smart contracts.
How to Start Your First Defi Transaction Safely
Now that you understand the basics, let’s quickly head to how you start your first transaction. Below are the steps to invest in Defi and some tips to navigate these financial systems safely.
Set Up Your Digital or Crypto Wallet
The first thing you’ll need is a crypto wallet. As much as you need physical wallets in the real world, transacting in Defi requires a digital wallet.
Now, there are several options available when talking about wallets. You can opt for hardware (cold wallets detached from the internet) or software wallets (hot wallets like desktop apps).
Remember, hot wallets are user-friendly but less secure, while cold wallets require technical knowledge but are safer. It’s essential to pick a wallet compatible with your Defi platform.
Purchase Your Digital Assets
After setting up your wallet, purchasing your first crypto assets is the next step. These assets are the stablecoins we talked about earlier.
So, you’ll want to decide which decentralized stablecoin you want to buy first. Afterward, pick a secure crypto exchange selling your desired stablecoin and sign up.
The next step is rather straightforward: deposit money and purchase stablecoin. You can refer to coinmarketcap.com’s market section when browsing for reliable crypto exchange.
Research and Select Your Defi Platform
Research trusted Defi platforms and applications before you make investment decisions. Think about team expertise, liquidity provider, project reputation, security audits, and user feedback.
There are various ways to earn from your stablecoins, including decentralized lending, yield farming, and non-fungible tokens (NFTs). So, you must choose the right crypto-lending platform with secure lending protocols for your investment.
Some examples of the best Defi platforms are crypto.com, Binance, Aave, and Nexo.
Navigating Decentralized Finance Safely
Despite the extensive security measures placed in Defi transactions, the fact remains that they come with risks. So, how do you stay safe in Defi and protect your crypto assets?
Here are some essential tips to remember when investing in Defi for the first time:
Back up your seed phrase when creating your wallet for easy recovery and to prevent loss of funds.
Avoid sharing or saving your seed phrase or private keys in cloud-based storage.
Use hardware wallets for long-term investments and soft wallets on dApps interactions and active trading.
Have a dedicated device for your Defi wallet and transactions to improve overall security.
Steer clear of shady websites and deals when using your dedicated device.
Employ crypto custodians to store and manage your cryptocurrencies.
Learn to assess risks when dealing with crypto and Defi. These trades come with several inherent risks, such as market volatility and smart contract loopholes, so knowing risk assessment can go a long way.
Diversification is another excellent tactic to reduce the risks involved in these trades. Do it by spreading your investments and assets across multiple decentralized protocols and projects.
Most importantly, start your Defi investment on a smaller scale before gradually increasing. Learning and exposing yourself to the trade is the safest route to succeeding in any project.
With the introduction of peer-to-peer finance like Defi, making money through traditional finance transactions is slowly becoming outdated.
By decentralizing finance, we now have the power to participate in the distributed economy and safely earn a living. And we can do all these within the comfort of our homes.
Keep learning and stay informed!