The concept of decentralized finance, or DeFi, started in a Telegram chat in 2018. It was when a group of software developers and entrepreneurs were trying to decide what to call the movement of financial services that would be automated, built on a blockchain and able to offer better options than traditional banks.
DEFI stands for decentralized finance, and is one of the pillars of blockchain technology and one of the reasons why the cryptocurrency market has been growing. DEFI offers users options such as exchanging cryptocurrencies in a decentralized way, as opposed to using a centralized exchange, borrowing or lending your cryptocurrencies for an annual %, staking your cryptocurrencies, taking out insurance, keeping your data secure or buying shares without restrictions, as the main options currently. Although in development and in the future we will see many more applications that will be used in DEFI.
The main advantage of DEFI is decentralization. This means that there are no limits to who uses it. Although it also has its risks and negative aspects, the fact of using decentralized platforms, allows anyone to use it without limitations. And this, although for some people may have less relevance, opens up any DEFI platform to everyone, even if governments or other entities try to block their citizens.
How to learn about DEFI
If you want to learn DEFI and know why everyone is increasingly using decentralized finance to generate income with their money, instead of having it in the bank, you can do it on our website. Where you can find different tutorials on how to get started and more generic, to tutorials more focused on a single platform or how to perform some aspect in DEFI that is usually complicated or there are doubts.
Below, I leave you with the main categories that you can find in our site, and I recommend you to go to the part you have more doubts or interest in
DEFI VS CEFI
With that said, let’s get started. The first thing is to know what is DEFI, and CEFI. DEFI stands for decentralized finance. What it means is that there is no company that can limit your purchases or sales, hold your cryptocurrencies or leave you unable to participate in what you want. Since DEFI is accessible to anyone with a wallet, which we will see later what it is. DEFI is based on communities and the exchange between different users, without an intermediary, as if it happens in traditional finance, where we have banks, or brokers to buy and sell shares.
CEFI refers to centralized finance, and is based on the fact that finance is controlled by a company or entity. Such as a bank, or the platforms and exchanges themselves, such as Binance or Coinbase, which finally, our funds belong to these platforms, and they can freeze our account, eliminate it, or limit us. For this reason, many people recommend having large amounts of your funds in wallets or decentralized platforms, where you avoid possible problems you may have with the platforms.
The next important thing to know is the wallets or wallets. In the same way that we have the fixed wallets, the virtual wallets are where we can store our cryptocurrencies and only we can access them, with a password and a key that we are given when we create our account. Wallets are the main tool used in the DEFI ecosystem and you will need them, both to store your cryptocurrencies and to use different decentralized platforms.
There are many wallets, although the most common ones to use are Metamask and trustwallet. Let’s take an example with metamask to understand it better. When you create an account, you will receive a seed phrase, which is a very long and unique phrase. This phrase is the one that allows you to recover your wallet in case you lose it or want to use it on another device that you are not logged in. Therefore, keep your seed phrase in a safe place, as it is the only way to access your wallet.
Once you have created your account, in this case in metamask, enter your password and you will see your wallet. The wallets are totally anonymous, so no one knows which address or which wallet belongs to which person, unless you share your address yourself. What you should know is that each wallet has an address, which is like your bank account number, and what you will use to send, receive and withdraw cryptocurrencies from your wallet. If you click on the address, you will be able to copy it to use it or send cryptocurrencies to your wallet. There are different types of wallets, but the most common are this type of wallets that are used with browsers or even with your cell phone with its mobile app. The funds that are in your wallet only you have access to them, so it is impossible for them to limit, steal or block your funds. The only aspect you should take into account is the security of your wallet, and never share the seed phrase with anyone, as this is the only way for your funds to be stolen.
What are the Networks in DEFI
Another aspect you should know about is networks. You have probably heard of the ethereum network, since it is the most well known. Currently there are many different networks, such as the ethereum network, solana, binance Smart chain, avalanche and many more. Each network represents a community and an ecosystem that interacts with what is inside the network. The networks allow us to use applications such as decentralized exchanges on the ethereum network for example, with our wallet. Each network has a cryptocurrency that is used to pay transaction fees. In the case of the etehreum network, if you want to send cryptocurrencies to another wallet, you will have to pay a transaction fee (gas fee), in this case etherum is used to pay for the fees. In the binance Smart chain, bnb is used, in the solana network, solana and each network has its token to pay for transactions.
The transaction commission, also known as gas fee, is paid to the people who validate that the transaction is correct and that if you are sending let’s say 1 ethereum, you really have it in your wallet and the information is correct.
It is very important to know that there are different networks, and when we send cryptocurrencies from an Exchange like binance to our wallet, it has to be the correct network, or we can lose our funds. So if you send USDT in binance using the tron network, you cannot send it to an ethereum network wallet, because they are different networks and the funds will not arrive.
Wallets and Different Networks/Networks
There are wallets that support different networks like metamask. Where you can configure networks and you can use ethereum network, binance Smart chain, avalanche, polygon and many more. But there are some networks, that you will have to use another wallet and create an account, because with metamask you will not be able to use them. For example, in solana, you will have to use another wallet, being sollet one of the most known ones. Or terra network, you will have to use terra station as a wallet.
Therefore, always before sending funds, make sure that you are really sending cryptocurrencies with the indicated network, and that the wallet supports and allows you to use this network.
As mentioned above, wallets allow you to use decentralized platforms such as a decentralized exchange like pancakeswap. Not only do they allow you to more securely store and store your tokens, but you can also interact with platforms to make your tokens useful.
Decentralized exchanges are one of the biggest uses today with wallets, where they allow you to exchange one cryptocurrency for another directly in your wallet. Without the need to use a centralized exchange like binance, you can do everything through these DEFI exchanges and exchange one token for another. If you want to know how they work, you can find it on our page about pancakeswap and how to use it.
Apart from decentralized exchanges, there are also many other features of the DEFI world that you can access in your wallet. Currently and the most used are lending platforms using your cryptocurrencies as collateral in exchange for another cryptocurrency like Aave, play to earn games, where you get tokens for playing like Axie Infinity, staking and farming platforms, to get a return on your tokens, and NFTs marketplaces among many other platforms.
Public information of each Network
Each network has all the information publicly accessible and where you can review any transaction and movement you have made. In the ethereum network we find etherscan and each network has a platform similar to etherscan, for example bscan in the binance Smart chain, where you find all the information of each movement. It is very useful if you send tokens and they don’t arrive or any transaction you make, you can see if there has been any error or failure, or it has been done. Although it may seem confusing the first time you see it, if you use wallets and you are looking at it, you will be able to find all the information of your wallet and your transactions.
Risks and Benefits
Although DEFI is a revolution in the world of finance, there are also risks to be taken into account to avoid losing the money you have invested. One of the most important aspects is your wallet, and never disclose the seed phrase or recovery phrase.
Wallets make your tokens much more secure if you don’t share your seed phrase with anyone, as this is the only way they can break into your wallet and steal your tokens. Although it is more secure if you don’t share the information with anyone, if you use centralized platforms, it is possible to recover your tokens or block your account in case of theft. But in your wallet, if the tokens disappear, you will not be able to recover your cryptocurrencies if the person who stole them sends them to you again.
On the other hand, if you have it in a centralized platform, your account can be blocked or at any time, you depend on the decisions of the company behind the platform.
The main benefit is the option of staking and farming on platforms and getting a high return on your cryptocurrencies. Although centralized exchanges also offer staking options, you will find the highest % in DEFI. With stablecoins, cryptocurrencies with the same value as the dollar, you can get 20% or more per year. If you compare it with banks, the difference is really big.
Another risk you should always look at, is the platform where you place your cryptocurrencies or interact with your wallet. Try to avoid new platforms or platforms that you don’t know the team behind or are supported by investment funds or reputable companies. Although it is not common or usual, it has happened that platforms have disappeared with the cryptocurrencies deposited by users. Therefore, if you are new, I recommend you to start using the most used platforms and with a higher LTV or total locked value within the platform. And over time try out newer and less known platforms with low capital to see the risks and reliability.
Another risk is to expose your wallet address publicly. Since wallets are totally anonymous, but if you share your wallet with other people, they will be able to see all the transactions you have made and everything you have linked to your wallet. This is not a problem if you don’t mind other people knowing what you have. The other solution is to have different wallets that are not connected to each other. If you send cryptocurrencies from one wallet to another, it is very likely that they can still know that the other wallet is also yours. Since usually nobody sends cryptocurrencies to another wallet in exchange for nothing.
How to send cryptocurrencies to other Networks or Networks
Finally, as we have already mentioned, there are currently different networks. And networks are currently not compatible with each other, although there are different projects that are working on solving this problem. At the moment, if you are using the ethereum network, you cannot directly send funds to a wallet in the binance Smart chain, and this happens with any network. For this, there are platforms called bridges. For example, the terra network bridge allows us, if we have tokens in the binance Smart chain, to send them to the terra network using the bridge. Although bridging is somewhat advanced, it is good to know that there are ways to move your funds from one network to another, although depending on the bridge, the commission may be somewhat high, especially if it involves the ethereum network. You can also find a post on our site if you want to see in more detail how bridges are used.
I hope this post has helped you to know in a superficial way the aspects that are most used and you should know in DEFI. Remember that if you don’t have an account with binance, you can create one below.