How to Start Invest in DeFi | Tips for Beginners

If you are reading this article, you probably heard of DeFi. Even though it is a well-known term that has gained popularity in the modern world, most people still don’t understand what exactly it means and how decentralised finances work. However, people are becoming obsessed with this ecosystem as experts believe it can provide lots of benefits and opportunities for those knowing how to trade.

Not only the DeFi sphere complex, but traders also need to know how to use each app and learn what is safe and unsafe. Even though it could be a challenging task for some, you can find a lot of information online to help you learn how to trade using this system. Since you can be overwhelmed with this information, we created this guide with simple definitions and a guide to help you get started.

What Is DeFi?

DeFi is short for Decentralised finances. DeFi provides all the same financial instruments and opportunities that traditional finances do without any intermediaries such as banks or brokerage firms. That is because DeFi eliminates the need for banks as they are replaced by blockchain and smart contracts. Using DeFi apps, known as dApps, users can lend or borrow crypto from peers, trade assets without any centralised entity, earn passive income and much more.

How to Get Started with DeFi

If you want to enter the DeFi space, the first stage will be to get a wallet that supports Ethereum and can be connected to various DeFi protocols via your browser. You can choose any convenience wallet, yet MetaMask is the most popular choice.

The second step is buying the relevant coin for the DeFi protocol you want to use. As we mentioned, most DeFi protocols are now using Ethereum, making ETH or an ERC-20 coin perfect options for you. For instance, if you are going to use Bitcoin, you will need to exchange it for an ETH version of Bitcoin, such as Wrapped BTC. 

In order to start benefiting from DeFi, is to start lending your currencies. It is an easy way which allows users to start using DeFi and learn about its opportunities. You can also become a “yield farmer” by collecting the governance tokens that will be awarded for lending out your digital assets. Explore more information and details on how to start yield farming on websites designed for this purpose. You can also use apps and services, like mymerlin, designed to help users simplify the process of trading and get better management over their tokens.

A second and also an easy way to start gaining profit using DeFi is to put your funds in a decentralised exchange, like Uniswap. This way, you will earn fees by becoming a market maker. Users can also make a profit by putting funds in the controversial Uniswap rival SushiSwap, which boosts the profit.  

The third and risky way is to invest in new and promising DeFi projects. However, we recommend you avoid this way to start with the DeFi ecosystem since this place is full of risks, scammers and errors. That is because it is always an experimental and risky space within crypto. If you still want to start your DeFi experience with this option, get the highest profit. But make sure that you know the project you are going to invest in and put money that you can afford to lose.

What Else You Can Do

While the methods we described are popular and effective for beginners, you can also explore other ways to begin to trade your currencies. Below you will see all other options available for newcomers.

Borrowing

Just like lending your currencies, you can start borrowing them using a number of dApps, like Aave or Compound. This includes depositing your collateral and taking out a loan from available lending pools.

Liquidity Providing

Decentralised finances don’t need or rely on intermediaries, so the capital that uses dApps to facilitate trading is provided by other users of the platform in the form known as a liquidity pool. These simply mean crowdsourced sums of pairs of digital assets that are locked into smart contracts.

If you want to join a liquidity pool, you will need to deposit equal parts of a trading pair, such as AVAX and USDC as an example, while also having permission to leave it there for a certain period. Then you will receive a portion of the fees that are generated by the trades made with that pair, which comes in the form of a third token. 

Yield Farming

Yield farming is considered to be risky. Once liquidity providers earn assets in the form of rewards for offering liquidity, there are also some opportunities to use digital assets as liquidity for other pools. This has been shown to amplify your returns by building multiple channels of passive income. Experienced yield farmers apply complex strategies, which usually involve sums of crypto between exchanges and dAps, aiming to find the highest interest rates.

Collateralizing an NFT

DeFi is popular, but NFTs are definitely a trend. So if you have a high-value NFT that you don’t want to sell but want to generate revenue from it, you can use specialised dApps to deposit an eligible NFT as collateral. This way, you will receive a peer-to-peer loan from a person who wants to offer you this liquidity.