Decentralized Finance or Open Finance, which is colloquially known as DeFi, describes financial smart contracts, digital assets, decentralized applications (dApps), and swapping protocols which run on the public blockchain. Most are based in Ethereum but don’t exclude those running in other smart contracting platforms like Tron, EOS, or IOST, for instance.
These products leverage decentralization of the blockchain to reorganize financial products to transparent and trustless protocols that function without intermediaries.
According to Defi Pulse, there is currently $7.3B worth of ETH locked and under management by Ethereum-based DeFi dApps. This has subsequently drawn utility to Ethereum, pushing network fees higher while also driving ETH prices to new year-to-date heights. Behind DeFi’s popularity is the concept of Flash Loans offered by some dApps and yield farming where investors “farm” for above market rates.
Yield farming leverages lending apps like Compound or Aave to create returns from DeFi protocols. These projects offer crypto-assets holders the ability to earn governance tokens and liquidity mining incentives for making use of on-demand DeFi procedures.
Choosing a Cold Storage Wallet for DeFi
Center to crypto is the safe storage of digital assets either through “cold” or “hot” wallet devices.
Cold wallets are electronic devices with security code encryptions that keep crypto coins information safe. They allow the crypto assets holder access to their digital currencies without being connected to the internet. Most of them are physical, and available at a fee.
Hot wallets on the other hand are digital storage facilities available online or on computer devices. Hot storage facilities are mostly free and users will find them accessible and convenient for many digital currencies. They are however much more easily compromised by hackers and thieves and could be susceptible to technical glitches that could lead to a loss of private keys.
Cold storage wallets or offline storage are the safer alternatives of the two since they are offline. These small devices are very portable and can be hidden in a strongbox or safe. Cold storage wallets are however pricey and might not support many crypto assets. Some of the most popular cold wallets out there include Trezor and Nano Ledger S.
To easily access the decentralized finance zone, users will need a custodial or non-custodial wallet to store their funds in. Non-custodial wallets such as Argent or MetaMask give the control of assets in storage to the sole holder of the wallet’s private keys. Every non-custodial wallet owner will have private keys and will need to jolt down a mnemonic phrase for funds restoration.
Custodial wallets store crypto assets in centralized exchanges such as Bithumb or Coinbase. The exchange acts as the custodian and will hold the user’s private keys. The custodian will use security and backup features to protect the crypto assets under their care.
Why and How to Use MetaMask?
MetaMask is a non-custodial, ETH and ERC-20 browser wallet interfacing only with the Ethereum blockchain. It integrates with the Firefox, Chrome, and Brave browsers.
An Ethereum browser extension, it not only works as a wallet but an interface for the Ethereum’s dApps. With it, users can store private keys and public addresses and interact with Ethereum based DeFi apps and smart contracts. MetaMask makes access to the DeFi zone easier because it turns an ordinary web browser into an Ethereum browser.
On it, DeFi enthusiasts can send, receive or store Ether and interact with small contract applications. The new Ethereum platform enthusiast will not need to run all Ethereum software to get in DeFi. MetaMask will run all these tasks on the MetaMask servers and store keys for Ether and other ERC 20 tokens.
Some other benefits of MetaMask include;
- Easy to download and install
- It is open-source and free
- It has Hierarchical Deterministic (HD) settings that give seed phrases for the account’s backup and restoration.
- It can also link directly to exchanges like Shapeshift and Coinbase.
- Easy to use through its simple interface
- Great customer support
- MetaMask is a non-custodial wallet storing keys on user’s servers rather than on remote servers
- It has a million active users and a fantastic and supportive community.
The year 2020 has seen DeFi become the talk of the decentralized ecosystem as the yield farming ecosystem and high lending interest projects become highly popular amongst users. The top DeFi platforms include lending protocols such as Compound and Maker. The derivative platform, Synthetix, and Decentralized Exchange (DEX), Uniswap, are also popular.
DeFi Pulse data shows that Maker and Aave are the most popular DeFi apps with each locking over $1.2 billion worth of ETH.
MakerDAO is a smart contract borrowing and lending service that uses MKR and DAI currencies to regulate the value of crypto loans on the Ethereum blockchain. By locking up ETH in a MakerDAO smart contract, users will generate the stablecoin DAI and use it as collateral for loans.
Oasis is the to-go-to web app for all things MakerDAO. Compound is yet another popular Smart Contracts lending app, with over $790 million locked in it.
Compound allows lending of crypto assets locked into the Compound protocol using cTokens to earn interest, trade, and transfer money earned to other applications. Any holder of Ethereum’s ERC20 tokens can alternatively use Uniswap, an exchange protocol to trustlessly swap their tokens. Uniswap pools together tokens into Ethereum Smart Contracts creating liquidity pools for trade.
Decentralized Finance (DeFi) represents a meagre one percent of the total cryptocurrency market capitalization. It has, however, become the main act in the crypto-assets market, making headlines as new projects arise, grow, and move at break-neck speeds.
As an illustration, the novel yield-farming project, Yam Finance is all the rage. The project had over $460 million locked into it in 17 hours on August 11, despite the unaudited nature of its code, which later failed.
Its code built in less than ten days mashes up exciting innovations in the space such as elastic supply, fair distribution, and on-chain governance reflected in projects such as Ampleforth, Yearn Finance, and Compound Finance.
There is therefore great potential in DeFi, but users need to watch out for governance, regulatory and security issues.