How to get started in Decentralized Finance?
Although DeFi presents itself as a real alternative to traditional finance, how to use it can be complicated.
Decentralized Finance (DeFi) is a hotbed of innovation offering a multitude of financial services found in our traditional banks. Anyone can take advantage of it from anywhere in the world. On paper, it is a real opportunity for all those excluded from the banking system. Nevertheless, in reality, its accessibility remains difficult for a public neophyte of crypto-currencies.
An ecosystem open to all
The emergence of Decentralized Finance is based on a simple observation: access to financial services depends on our social level or where we live in the world. Financial inclusion is synonymous with social inclusion.
Financial services on DeFi protocols have no entry requirements: no personal information is requested from its users. Its anonymous character favors the respect of the private life of everyone. Thus, whatever your personal situation, you will be free to use the different services of Decentralized Finance. It is an anti-discriminatory system open to all.
The DeFi protocols, called Dapps (acronym of Decentralized Applications), are web interfaces based on the Blockchain technology. Thus, the pre-requisites to be able to use Decentralized Finance services are:
- access to a computer (computer or smartphone)
- an internet connection.
Which Blockchain(s) to select?
Each blockchain has its own native tokens. They are easily identified by their symbol, such as ETH for the Ethereum network. These native tokens operate as fuel as they are needed to move funds around the Blockchain in question. So, like a car that needs gasoline to move, you will need to acquire a certain amount of native tokens from the network in order to use it.
Each network has more or less transaction costs depending on its level of congestion, i.e. whether it is heavily used or not in relation to the number of transactions per second it can support. Let's take, again, the case of the Ethereum blockchain. To date, it can only handle 14 transactions per second, while demand is much higher. The slowness of its model leads to transaction fees sometimes reaching several tens of dollars. By comparison, the Polygon network can perform 7,200 transactions per second, which makes this blockchain one of the most affordable on the market.
Beware, a blockchain with low transaction costs can potentially have counterparts. Network security should be one of the main selection criteria. Although Ethereum is expensive, it is one of the most secure blockchains. It has never had a single flaw since its inception in 2015.
Which DeFi protocol to choose ?
After selecting the Blockchain to interact with and acquiring a little bit of its native token, it's time to start using DeFi. Today there are more than 1000 Decentralized Finance platforms. Each of them offers a multitude of financial services: saving, borrowing, currency exchange, trading, insurance, etc. Some offer more attractive rates than others, with a higher level of risk.
So how do you find your way around all these Dapps? The general public often finds itself lost: this is the problem that the Decentralized Finance ecosystem is facing today. A user new to the world of crypto-currencies will then tend to favor CeFi platforms. Indeed, a bad selection of Dapps or even a neglect of security measures can lead to a partial or total loss of his funds. With more than $7 billion stolen by hackers on DeFi in 2021, many are hesitant to take the plunge.
Interacting with DeFi protocols
Since DeFi is based on Blockchain technology, each of its users must have a compatible Blockchain address. Anyone can create one, for free, by downloading a web browser extension, like MetaMask for the most famous one. Its role is to act as a bridge between web browsers and Dapps.
Not all extensions support the same networks. For example, MetaMask allows transactions on the Ethereum, Polygon, Avalanche, Fantom, Binance Smart Chain blockchains, etc. The Phantom plugin, on the other hand, only supports the Solana network.
To date, Decentralized Finance has one real barrier to entry: know-how. Since it is still a young ecosystem, the user experience is not optimal for those who are not very comfortable with crypto-currencies. Getting started with small amounts of money is the best way to safely grasp the understanding of this new financial world.
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