DeFi for Beginners | Part 1 of a 2-part series
Decentralised Finance can be said to have kicked off in 2015 when Ethereum (ETH) launched to use its blockchain as a base layer for developers to build all kinds of decentralised applications — ranging from games, such as CryptoKitties, to financial applications. Cryptocurrencies have grown exponentially over the last decade, reaching a market capitalisation of over $2.2tn by the end of 2021. According to data from Defillama, TVL rose from just over $18bn at the beginning of 2021 to $240bn by year-end — a 1,200% increase.
The introduction of DeFi has been a game-changer in the history of TradFi (Traditional Finance). But what is DeFi, and why should you care about DeFi?
DeFi uses cryptocurrencies and smart contracts to provide financial services, eliminating the need for intermediaries such as banks. With DeFi, no institutions or organisations handle or control their money, meaning ownership always stays with users, creating a more unrestricted financial experience. Smart contracts could be programmed for much more complex tasks than just money transfer, where crypto-asset owners can trade, lend, borrow and manage their money in a way that provides complete independence. In other words, you are your own bank.
It is open-source, which means that protocols and apps are theoretically open for users to inspect and innovate. In the same way that Lego blocks allow us to use our imagination to build new and exciting things, the open-source code of DeFi allows high interoperability and creativity for structuring contracts and assets. As a result, developers can choose protocols to unlock unique combinations of opportunities and develop their dApps to facilitate peer-to-peer business transactions.
Why Use DeFi?
DeFi provides simple and effective access to financial services for every individual. There are several advantages of DeFi for many users. To name a few:
- It eliminates banks and other financial companies’ fees for using their services.
- Permissionless; Anyone with an internet connection can use it without needing approval.
- Users can transfer funds within seconds and minutes.
- Lower transaction rates, higher interest rates or an opportunity to diversify investments.
What Can You Do with DeFi?
DeFi as an ecosystem consists of many uses or categories, such as:
- Asset Management
In the DeFi space, asset management tools include wallets, apps, and dashboards for managing user assets. Users have complete control over their assets — buying, selling or transferring. They can put their assets to work to earn interest.
2. Borrowing and lending
Borrowing and lending are among the most common use cases for DeFi applications. Traditionally, lending and borrowing is facilitated by a financial institution such as a bank or a peer-to-peer lender. In the crypto space, lenders and borrowers are connected through a DeFi lending platform. There have to be three parties involved: lenders, borrowers, and lending platforms.
- The lenders are the ones who want to lend cryptocurrencies and earn an interest (borrowing APY) which is paid by the borrowers.
- The lending platforms connect borrowers and lenders and process the borrowing and lending of transactions. These can be autonomous, decentralised, or centralised platforms (a group of people or companies operating the platform).
- Borrowers pay interest on the amount they borrowed in exchange for having funds available immediately.
3. Yield Farming
Also known as Liquidity Mining, it is another way of earning rewards in DeFi. Users lock up their crypto token holdings and earn interest based on pre-existing smart contracts. It is similar to staking crypto tokens, but the difference lies in the operating mechanism. Especially in a market downturn, asset owners would not want to sell their tokens. At Akropolis, users can put their assets to work by depositing them in the staking vault and earning passive yields instead of having them idling in exchanges. There is no lock-up period, and users can withdraw at any time. Also, it is low-risk.
4. DAO Governance
In the decentralised world of blockchain, projects are often looking for ways to distribute greater power and responsibility to their users. For example, AKRO token holders who staked their AKRO are entitled to participate in DAO. AKRO is a governance token that grants holders the right to raise and participate in decisions that affect Akropolis. This protocol-level governance ties to managing the DeFi products built on Akropolis. As part of the Akropolis community, you have a voice by voting or creating a DAO proposal.
Getting Involved in DeFi — Where Do You Start?
- Step 1: Set up a crypto wallet
You will require a cryptocurrency wallet installed on your browser, one that ideally supports Ethereum and can also connect to various DeFi protocols. A cryptocurrency wallet acts as a safe place to store your assets. This wallet will be your gateway to DeFi.
MetaMask is the most commonly used wallet, although there is a wide selection of wallets available that will allow you to connect and interact with DeFi. Learn how to set up a Metamask wallet here.
- Step 2: Purchase relevant tokens on Crypto exchanges
You will now need to buy the relevant tokens for the DeFi protocol you plan to use. For example, Akropolis users purchase AKRO tokens and earn interest on them by staking; and they will need to buy ETH for gas fees. You can acquire ETH on a cryptocurrency exchange like Binance or Kucoin. Ensure that you sign up to legitimate websites as the cryptocurrency industry is rice with scams.
Alternatively, you can also acquire relevant tokens in the Akropolis dApp directly with fiat using Ramp Network. Ramp was integrated to allow users to do an instant fiat-to-crypto purchase.
- Step 3: Connect your wallet to the DeFi dApp which you would want to get involved in
To participate in the future of DeFi, get started at Akropolis here. You can
a) Stake your AKRO tokens and earn up to 13.78% APR (at the time of writing);
b) Deposit relevant assets into Yearn vaults (yVaults) and earn interests on your assets; or
c) Deposit your stablecoin assets (BUSD or USDC) into Vortex vaults, which uses an on-chain basis trading strategy that aims to generate long-term, sustainable and rewarding returns while remaining market-neutral. Learn more about how it works here.