The phrase could pass for a boutade, but currently it is not. Smart contracts executed on blockchain are allowing financial services to be redefined, it is what is known as 'Decentralized Finance' or 'DeFi'.
For many, I until recently, hearing the word finance is as if it were spoken to us in Chinese, Welsh or Cornish. If we add blockchain technology and many new concepts, things get even more complicated. But if you still want to move forward (and you're reading this, I suspect you do) do as you do when listening to today's music, simply let yourself go. By the way, the song is by Gwenno, a Welsh artist who, after leading The Pipettes, began a solo career making music in Welsh and Cornish, modernizing and popularizing these Celtic languages.
Before moving on to the guide that the title announces, let me give you a concrete example of the importance of decentralization.
One of the most successful DeFi projects is Uniswap. The idea is simple, to be able to exchange currencies on the Ethereum network. And you may be thinking: well, what a novelty, it's like a currency exchange. Effectively, it is an exchange house but without a house, or in other words, a decentralized exchange (DEX) as opposed to centralized ones (CEX). The main difference is that in CEX there is an exchange between you and the house, in a DEX it is between you and other users who bring liquidity and that exchange is arbitrated by a smart contract. In both a commission is charged, but in CEX it is carried by the house and in DEX it is carried (mainly) by users who provide liquidity. One of those users could be you.
Although from the user's point of view the thing is similar, I exchange my coins for others and someone takes a commission. At a general level, many intermediaries are removed, it is not necessary to identify oneself in the process, the risk of the house disappearing is mitigated, human arbitrariness is reduced... I don't know if it is a good example, but I don't have a better one, it is like going from telegram to e-mail, from intermediary companies to protocols.
DeFi Development Company is called the Money Legos. Because being open protocols that do not need permission to be used, they can be built on top of each other to continue building the pyramid of financial services. It would be unthinkable that the application of your bank was not from your bank, in DeFi the wallet applications can be diverse, in the same way an application can use other applications and currencies.
I'm sure you already know this, but let me remind you that these applications are still very experimental and that you should be very careful when putting real money into the system.
DeFi practical guide
This brief guide assumes that you understand the ideas of blockchain, smart contracts, and decentralized finance. It also assumes that you followed the Getting Started with Crypto Guide, and already have cryptocurrencies, specifically Ethereum, on an exchange or in a wallet. Do you think there are many requirements? Prepare yourselves for this is only the beginning.
Decentralized finance can be applied to any blockchain with smart contracts, but this guide is based on DeFi on the Ethereum blockchain. Although there are already blockchains that are candidates as alternatives to Ethereum and that are building their DeFi ecosystem, they are still very small and even more experimental than those of Ethereum. Projects that intercommunicate blockchains are also being worked on. Did I tell you that this has only just begun?
1 - Install and configure Metamask
Using a DeFi token development application is as simple as using a web page, with the addition that the actions you take will be saved on the blockchain. Therefore, you need a purse or wallet that can interact with the browser and with the Ethereum blockchain. The most popular by far is Metamask, which now also has a mobile version.
I use a crypto-only browser: Brave. It helps me to keep order and I can browse with peace of mind in my usual browser: Firefox. Brave is a browser based on Chrome and emerged from a crypto project (BAT) that aims to redefine online advertising. So this might be a good time to give Brave a try and install Metamask. If I haven't convinced you, you can install it in the browser you usually use, of course.
Once installed, the after Metamask will appear at the top right in your browser. There you can create your account. What you are doing is not registering with your email and password as in any centralized website, what you are doing is creating an Ethereum wallet. This implies that no one can recover your account if you lose the private key. In the creation process, they will ask you for a normal password (without user), and they will give you 24 words in English, the so-called seed phrase. You will have to store them carefully, as they are not recoverable.
If you want to have Metamask on multiple computers or want to switch to a new one, just after installing Metamask enter the seed phrase.
2 - Transfer Eth to metamask and know its interface
Metamask will ask you for the password in each session you start as a protection measure, once entered you will see its interface. At the top you can choose which "Ethereum Network" to use, unless you want to do experiments or use other blockchains, you will always have to leave it on Mainnet (main network). Below it will appear the public key of your wallet, you can see it as the bank account number. Then you will see the amount of Ethereum in the wallet and the actions: buy, send and exchange. Finally you will have the list of assets (coins) you have, the history of actions you have performed and the possibility of manually adding a token to the wallet (it refers to adding it to the list of assets, not adding new coins).
Now we are going to send Eth to our Metamask wallet. If you already have Ethereum on Coinbase or any other exchange, simply go to it and find the option to send. In the 'send' interface you will have to put the public key of Metamask and the amount. It's simple, but make sure the key is correct and that you send Eth; because if you make a mistake there is no 'undo' button. You will see that a small commission is already deducted from the transfer in the Ethereum blockchain. Minutes later, you will already have your Eth in Metamask.
3 - Interact with a DeFi dapp
There are tons of decentralized applications (dapp), some of them are DeFi, you can see a very complete list on Dappradar. Once you have Metamask or another wallet installed, using it is simply using the web and confirming the actions in the wallet.
3.1 DEXes: Uniswap and 1 inch
Visiting the uniswap.org website we will see a button that will take us to the application itself. There we have a button that will allow us to connect uniswap and our wallet. At that moment we can already use the application that allows us to either exchange one token that we have for another, or bring liquidity (pool) closer with our tokens. If we have UNI tokens we can also vote on Uniswap decisions, it is what is usually called governance.
Uniswap is the most famous decentralized exchange, followed by Sushiswap, which was born as a copy of it but evolved differently. In fact, Metamask already allows you to make exchanges directly in the application, for that it uses the Uniswap protocols and many others.
1 inch is a decentralized exchange aggregator, that is, when you want to exchange two 1 inch tokens, look for the best option among many DEXes. Since the price of commissions in Ethereum is currently an issue and each DEX offers slightly different prices, 1 inch offers the best option. The operation is very similar to Uniswap; it also has its own token (1 inch) for governance and has pools to earn profitability by providing liquidity.
3.2 Bitcoin on Ethereum
The Ethereum and Bitcoin blockchains are different, so if we want to trade Bitcoin and Ethereum we cannot do it directly in a DEX on the Ethereum blockchain. To solve that problem, a good number of tokens like wBTC, HBTC, renBTC and others were born. What they do is lock a Bitcoin on the Bitcoin blockchain and create a wBTC on the Ethereum blockchain. There are several ways to do it and some are not very decentralized, everything is said. But they allow us to use Bitcoin in DeFi.
3.3 Loans
It is one of the usual use cases of DeFi, requesting a loan by leaving a cryptocurrency as collateral. Aave or Compound is two of the most common platforms. But if you don't see yourself asking for a loan, you may want to be the one to deposit cryptocurrencies that are going to be lent, earning interest. When entering Aave you will see for each cryptocurrency: what amount is deposited, what amount is loaned, what interest is offered to the depositer and what fixed or variable interest is paid by the person requesting the loan. It is transparent, automatic, self-regulated (if there are few deposits, the interest paid goes up; if there are many, it goes down) and does not depend on anyone's decision.
3.4 Derivative products
Financial derivatives are products that are based on the price of another asset. Synthetix or UMA are projects that allow the creation of synthetic derivative products. For example, create a token that will have the value of gold or another that will have the value of a share such as Apple. Nexus Mutual allows you to mitigate risks through insurance against events such as an error in a smart contract.
Financial derivative products are very complex and at the same time widely used in traditional finance. They are expected to have great potential in the future, although their risks make them more difficult to tackle. An argument in its favor in the crypto world is the need to be able to represent the value of real-world assets.
3.5 Dashboard
Loans, DEXs, algorithmic stablecoins, funds, synthetic assets and many more products to come, almost all have in common that they offer profitability and certain advantages to those who offer liquidity. The problem is that it's not easy to remember where we deposit our coins, and that's what control panels like Zerion are for. They give us a summary of our deposits in the various applications we use, tell us their present value, and offer to interact directly with various protocols.
4 - The (damn) commissions
As soon as you start playing with these tools you will realize that for every action you take with the wallet, that is, every time you interact with the Ethereum blockchain, you will have to pay a commission. We said that a blockchain is many computers in the world recording those actions and executing smart contracts. Commissions are the payment we make for that service. The problem is that with the great rise of Ethereum and the large number of people using the blockchain, the commissions went up a lot. Very much.
This greatly limits the development of DeFi. But everyone is aware and Ethereum is deep in the release of version 2.0. Also other blockchains are taking advantage of this problem to offer themselves as ecosystems with very low commissions.
Conclusion
Surely there are many problems and difficulties to be solved. Of course, DeFi may never become the hegemonic system. But we are witnessing the creation of a new financial system, more open, more transparent, with fewer intermediaries. Could this be the beginning of the new financial system? This has just started!
