DeFi for Dummies — Part 2 of 1
HOW TO ACCESS DE-FI?
To access DE-FI we need D-apps.
To access Dapps and decentralized web, i.e Web 3, you need a dapp browser like metamask etc.
It’s quite similar to us needing a browser to access the sites over the world wide web.
Metamask is a chrome extension and can be accessed via phone and laptop both.
Here’s how you can set it up-
STEP 1 — Add metamask extension on your google chrome browser as shown below-
SETP 2 — Click on “Get Started” as shown below-
STEP 3 — If you’re new to metamask, click on create wallet as shown below-
STEP 4 — Click on “ I Agree” as shown below-
STEP 5 — Create your password as shown below( recommended to keep 32 digit alphanumeric)
STEP 6 — Now, it’s highly recommended to go through the guidelines mentioned on the right side and the video, as shown below-
Please understand that, the secret recovery phrase or your seed phrase is like your login id and password to your netbanking account.
Losing it could result in losing your funds forever !!
STEP 7 — You now get your “secret recovery phrase” as shown below-
Things to take care of here-
- Never share this “seed phrase” with anyone.
- Keep it noted down at multiple places where nobody can find it except you.
- Understand that this phrase is a “master key” to your account.
- Note this down somewhere safe since you’ll net to confirm your seed phrase in the next step.
STEP 8 — After confirming your seed phrase, your metamask is now set-up completely-
STEP 9 — This is how your Metamask wallet would look like-
As you can see in the image above-
- Your account is named “account 1” with the address “ 0x2ba…”
- Ethereum mainnet blockchain is being used to do transactions.
Now to see all the transactions associated with your account, there’s a digital open ledger, called Etherscan.
Etherscan is a block explorer which keeps track of all the blocks added to the ethereum blockchain network.
It’s a digital version of the “physical passbook” provided to us by our CE-FI banks .
This is how etherscan looks like for our above created “wallet address”-
UNDERSTANDING DE-FI PROTOCOLS/PLATFORMS -
De-Fi protocols/platforms are immutable smart contracts running over a specific blockchain network which provides financial services like those provided by banks and other financial institutions.
For eg- lending, borrowing, staking, farming etc.
1. CURVE.FI ( CURVE FINANCE) -
It’s a decentralized exchange(DEX) which provides the facility to swap one stablecoin with another and charges some fees for this.
In order to use DEX you need to connect your “wallet”, Dapp browser to it.
This is how curve.fi interface looks like-
Here you can-
- Exchange stablecoins.
- Lend your crypto to earn interest.
- Borrow crypto by providing collateral & much more.
2. AAVE PROTOCOL -
It’s an open source DE-FI protocol which provides services like lending, borrowing, exchanging, staking etc.
You need to connect your DAPP Browser(wallet) with AAVE to make transactions.
This is how AAVE interface looks like-
Here’s an example of making money in DE-FI-
- Deposit $1000 as collateral.
- Borrow TrueUSD at 2.93% APY.
- Swap TrueUSD with BUSD.
- Lend BUSD at 14.49% to the liquidity pool.
- You now are getting (14.49–2.93)= 11.53% APY.
(It’s recommended to test these flows on TESTNET before deploying them on MAINNET).
Isn’t it cool? You’re getting money to borrow money?
STAKING AND LIQUIDITY POOLS -
Before we explain liquidity pools and staking, we have a question for you!
We provide banks the liquidity of funds but that happens when we become the bank in DE-FI?
We get the profits and rewards that the banks are making! Right?
To understand Liquidity pools, we need to understand DEX(Decentralized Exchange) and to understand DEX we need to understand CEX (Centralized Exchange).
Centralized exchanges are platforms where an exchange takes place by matching the buyer with the seller.
Over every centralized exchange-
- Buy/sell happens only when there is a buyer for every seller selling a stock.
- There’s no liquidity pool or reserve funds/stocks.
- Trade only happens when the buyer is buying at a price higher or equal to the price at which being sold by the seller.
- CEX charges fees from both buyer and seller.
Decentralized exchanges are smart contracts deployed over some specific blockchain network which provide exchange of stablecoins, cryptocurrencies etc.
You can understand DEX and the liquidity pool with the help of the above example.
Unlike CEX, there is a liquidity pool in DEX, where all the extra coins,tokens are stored in order to ensure smooth exchange/swap/trade.
Trades take place irrespective of availability of buyer/seller since every DEX has locked funds in their liquidity pool which it can use.
Exchange fees are there but are very low as compared to CEX.
DEX fees are inversely proportional to the size of the liquidity pool.
Liquidity to the liquidity pool is provided by various lenders who stake/lend their coins/tokens & earn rewards.
Dex rewards the liquidity pool lenders using the profit they made from charging fees on transactions.
We hope now you know what liquidity pools are !!
SOME MORE DEX & AMM -
Automated market maker(AMM) is a type of DE-FI protocol where exchange happens using liquidity pools unlike P2P exchanges where a buyer and seller must be present for the exchange to take place.
Some of the AMM’s are-
#1. Beefy.finance- It’s one of the biggest AMM on BSC Network. Here’s how it looks-
As you can see it has 254 vaults with market cap of $218.87 million.
You can stake your coins on beefy and earn rewards for it.
#2. Pancakeswap- It’s the biggest AMM on BSC network. Here’s how it looks-
As you can see above, you can earn rewards for staking your coins etc.
Pancakeswap has a total TVL of $12.1 billion.
The higher the multiplier offered for a particular pair of tokens, the more important is that token pair for the DEX.
For eg- For providing CAKE/BNB liquidity Pancakeswap is offering 40 times more reward than normal since CAKE is their native token and it is important for them.
Higher the multiplier, higher is the APR/APY.
Lower the TVL in a pool, higher the APR/APY.
This is it. Pheww. Part 2 of 1 of DeFi for Dummies is done.
If you want to learn how to generate trustfree ROI then you may like what we’re doing at Fidaro.
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