A Beginner’s Guide: How to Invest in DeFi

Decentralized Finance (DeFi) is an exciting new financial frontier and indeed provides an opportunity for fantastic wealth creation. However, it can be daunting (even outright impossible) for investors who are new to cryptocurrency, and have yet to create an exchange account or buy their first Bitcoin, Ethereum, and the like. For those wishing to “wade into the water”, this guide is an entry-level walkthrough for basic terminology, links to safe platforms, and  instructional videos to set up your personal cryptocurrency infrastructure.

  • Investing in cryptocurrency involves significant risk of loss. Only invest what you can afford to completely lose. Be aware that, at some point, a scammer will try to take your money. You will, most likely, lose all the funds in a transaction because you sent crypto to the wrong wallet address, or via the wrong blockchain. It happens — everyone has a story. It’s a right of passage; the price we all pay for being early. Expect some battle scars — we all have them.

    A question to consider: Which of these options do you find most appealing?

    A

    Conservative

    I just want to buy bitcoin and hold it for 20 years. I don’t want to manage money or track projects or my investments.

    B

    Moderate

    I’m willing to invest my assets in centralized platforms to earn better returns. I’m willing to learn how to move funds around.

    C

    Aggressive

    I’m willing to fully manage my funds and keep track of their allocations on various chains. I want to earn high returns.

    There’s no right or wrong answer. Just remember what you selected. We’ll bid you farewell at the appropriate time. 

    The flow of this article is simple: we’ll discuss centralized exchanges (CEX) and decentralized exchanges (DEX), name a few of the popular ones, and provide links for you to access them. We’ll explain the basics of crypto wallets and, again, offer a few links to those resources so you can set up your wallets. Finally, we’ll look at leading blockchains in DeFi, some projects in those spaces, and some tools you can use to track your financial growth.

Want to skip ahead? Feel free.

A quick table of contents with jump links.

Centralized (CEX)

Industry leaders like Coinbase and Binance, and ways to get money into the cryptocurrency ecosystem.

Decentralized (DEX)

An intro to DeFi: experience cryptocurrency wallets with more freedom, access, opportunity, and risk.

Your Crypto Wallet

An introduction to MetaMask: a leading crypto wallet, and the basics of how to transfer crypto into it.

CeFi / CeDeFi / DeFi

We’ll define these categories, highlight projects, assess risks, and discuss trade-offs of each.

Popular CeFi Products

CeFi is a stepping stone from CEXs like Coinbase to full-fledge DeFi investing. We highlight top platforms.

DeFi Investing

An introduction to DeFi, a quick glance at blockchains, bridging, and a few top-tier DeFi teams/products.

Centralized Exchanges: An Introduction

First, let’s define what centralized means with regards to the cryptocurrency industry. Our friends at Cryptopedia (by Gemini, a centralized exchange) have an excellent glossary which we will source through this article. You can view the entire glossary here on our blog. A few ways of considering centralization or a centralized entity for this post can include:

  • A central bank controls the monetary policy and currency of a nation-state. Central banks function as the bank of governments, and have the power to set interest rates and the money supply. The Federal Reserve is the central bank of the United States.

  • A central bank digital currency (CBDC) is a digital version of a country’s fiat currency. Regulated by a country’s monetary authority, CBDCs are designed to replace traditional fiat and increase ease of use for those that deploy them. CBDCs can increase the speed and transaction costs of fiat and cross-border settlement, potentially increasing financial inclusion for many. Yet, unlike blockchains, CBDCs aren’t decentralized and don’t have a supply cap. Critics contend that CBDCs won’t limit inflationary money printing — and that government control of a nation’s money supply through a CBDC could have serious repercussions concerning financial privacy and censorship.

  • Centralization refers to the consolidation of control, authority, and access by a person or group. In a blockchain context, centralization refers to the level of privilege and distribution of nodes verifying and managing the network. Blockchains relying on powerful ‘super nodes’ or nodes concentrated in a limited geographical area are considered more centralized.

  • Centralization refers to the concentration of power in the hands of too few. Centralization can lead businesses to a lack of transparency, efficiency, and balance and sometimes even result in the limited effectiveness of products and services. Centralized blockchains may distribute profits to a select few rather than allowing all potential users of the system to participate. A centralized blockchain structure may also stifle equitable governance and decision-making processes and promotes censorship and control of data, which are not favorable to the value a system should provide.

  • Centralized decentralized finance (CeDeFi) is a blockchain-based system that is a hybrid between decentralized finance (DeFi) and centralized finance (CeFi) meant to leverage the best of both models. CeDeFi was created to allow large CeFi organizations to make use of various DeFi financial instruments. CeDeFi was also designed to offer numerous types of financial products and services that are not normally available through traditional DeFi. CeDeFi blockchain protocols also help large enterprises better adhere to strict regulatory and compliance issues, allowing them to operate more smoothly.

  • A centralized exchange (CEX) is a centrally controlled platform used to trade crypto assets. Centralized exchanges act as intermediaries between buyers and sellers. These platforms are custodians of user data and funds.

  • Centralized Finance (CeFi) is often thought of as a bridge between traditional finance (TradFi) and modern financial applications like blockchain and financial technology (FinTech). CeFi enterprises generally operate using a centralized governing body that controls users’ funds. Although numerous interpretations of what CeFi encompasses exist, centralized exchanges (CEXs), cryptocurrency asset custodians, and numerous FinTech applications like payment service providers are typically considered to be CeFi. CeFi service providers are often characterized as easy-to-use and heavily regulated with low fees. However, because they are centralized, they are potentially susceptible to a single points of failure.

For a majority of crypto users and investors, centralized exchanges (CEXs) are the main routes (on-ramps) to convert fiat to cryptocurrencies. From there, users can either store their coins on the CEX, or transfer them to private DeFi wallets, other CEXs, DEXs, etc.

For more conservative investors who are not looking to venture too far into crypto or DeFi, a CEX is likely to offer all desirable features and allow the investor to gain the desired exposure to cryptocurrency.

Another desirable feature of CEXs: US-based companies offer downloadable documents for tax reporting, which can save an investor a great deal of time and organization.

Comparing Centralized Exchanges

Coinbase: A popular CEX for new crypto investors.

Coinbase is a publicly traded (Nasdaq: COIN) American company founded in 2012. It offers a simple interface for beginners, a more advanced platform for traders, and a suite of tools and services for institutions, as well as a debit card, a stablecoin, and a popular DeFi wallet (Coinbase Wallet) for those who wish to move funds out of the main CEX product.

Coinbase is one of the most popular centralized crypto exchanges (CEX) in the US, making it one of the most popular in the world. Coinbase is a strong – and common – first option for new investors, as the platform is simple, easy to use, and connects easily with any major bank.

Simple design and single-click executions are part of what makes Coinbase so appealing for new users. A minimal interface leaves nearly zero room for error or confusion: simply buy and sell. Users have the option to buy with funds from their bank or to purchase crypto assets with existing funds they already have on the platform. Pulling funds back to one’s bank account is just as easy: users can send funds back to their bank in less than a day.

Comparing Centralized Exchanges

Binance: Another popular CEX with more selection and lower fees.

Binance is a global leader in cryptocurrency trading. US-based investors will need to use Binance US, the company’s US entity, to buy, sell, and trade crypto. Binance is known to have lower trading fees than Coinbase, but less experienced investors may get lost in the user interface on Binance and may prefer the simplicity of Coinbase.

Investors who are looking for a robust lineup of buying options will likely prefer Binance, as it (currently) offers more tokens to buy, more trading pairs, and lower fees. Users can transfer funds to external wallets using either the Binance  (BSC) or Ethereum (ERC-20) networks.

Some users will prefer Binance features and options over the intentional simplicity of Coinbase. If you plan to expand your knowledge of crypto, tokens, and intend to make strategic trades (for example: to and from Bitcoin) and prefer to have just one exchange account, you may find Binance a more compelling option over the long-term.

Comparing Centralized Exchanges

Other great CEX options for new crypto investors.

There’s nothing wrong with having multiple points of access to crypto. Exchanges do not charge fees for membership: you simply pay for your trades if/as you execute them. Having an account with a few exchanges gives investors a few advantages: more platforms to spread investments out, access to more — or newer — token offerings, competitive prices, and the ability to buy or sell assets if one CEX goes offline due to system overload (during volatile markets or due to high web traffic).

Gemini (CEX)

Based in the US and founded by the famous Winklevoss brothers. A Gemini credit card is in development.

Kraken (CEX)

Kraken is a global exchange HQ-ed in the US. It is well respected and offers CeFI staking opportunities.

KuCoin (CEX)

A widely popular, no-KYC exchange that offers a very wide range of trading pairs and margin trading.

A quick explanation of the normal crypto user money flow.

There’s usually more than one way of doing something: cryptocurrency, CeFi, CeDeFi, DeFi are no different. This article and graphic were created to show the commonly used beginner’s route to moving money into crypto.

Farewell, conservative-risk cryptocurrency investor “A”

If you feel content with owning popular, tier-1 cryptocurrencies like Bitcoin, Ethereum, and other well-known projects, and you are comfortable leaving your assets in your favorite centralized exchange account, you can stop reading here. Essentially, this is akin to owning stocks, and leaving them in your “e-trade” account (but for crypto). And that’s perfectly fine, if that meets your needs. Thanks for reading!

A

Conservative

I just want to buy bitcoin and hold it for 20 years. I don’t want to manage money or track projects or my investments.

B

Moderate

I’m willing to invest my assets in centralized platforms to earn good returns. I’m willing to learn how to move funds around.

C

Aggressive

I’m willing to fully manage my funds and keep track of their allocations on various chains. I want to hear high returns.

Decentralized Exchanges: An Introduction

First, let’s define what decentralized means with regards to the cryptocurrency industry. Our friends at Cryptopedia (by Gemini, a centralized exchange) have an excellent glossary which we will source through this article. You can view the entire glossary here on our blog. A few ways of considering decentralization or a decentralized entity for this post can include:

  • A decentralized application — or dApp — makes use of blockchain technology to address use cases ranging from investment to lending to gaming and governance. Although dApps may appear similar to web applications in terms of user experience (UX), dApp back-end processes eschew centralized servers to transact in a distributed and peer-to-peer fashion. Rather than using the central Hypertext Transfer Protocol (HTTP) to communicate, dApps rely on wallet software to interact with automated smart contracts on networks like the Ethereum blockchain.

  • A decentralized autonomous organization (DAO) is a blockchain-based organization that is democratically managed by members through self-enforcing open source code and typically formalized by smart contracts. DAOs lack centralized management structures. All decisions are voted upon by network stakeholders. DAOs often utilize a native utility token to incentivize network participation, and allocate proportional voting power to stakeholders based on the size of their stake. As DAOs are built on top blockchains — often Ethereum — their transactions are executed transparently on the underlying blockchain.

  • Decentralization is in many ways the central and defining characteristic of blockchain technology. Applying decentralized processes and tech can reduce or even eliminate the role of intermediaries across industries and use cases. For example, by removing banking institutions from financial instruments, decentralized finance (DeFi) platforms can distribute profits and governance to users and the wider community rather than a centralized intermediary. On an even more foundational level, decentralized networks crowdsource consensus, making it much harder for any one entity to control or censor the data that transacts through that network. However, many experts believe that achieving optimal decentralization can tend to decrease network throughput.

  • A decentralized exchange (DEX) is a financial services platform for buying, trading, and selling digital assets. On a DEX, users transact directly and peer-to-peer on the blockchain without a centralized intermediary. DEXs do not serve as custodians of users’ funds, and are often democratically managed with decentralized governance organization. Without a central authority charging fees for services, DEXs tend to be cheaper than their centralized counterparts.

  • A Decentralized Exchange (DEX) aggregator is a system that makes use of a DEX to give traders the ability to buy, sell, and trade different tokens and coins from numerous exchanges via a single streamlined interface. 1inch is an example of a DEX aggregator that is designed to find users the best asset price from DEX protocols like Uniswap, Balancer, SushiSwap, Bancor, KyberSwap, and others — all in one place. This type of specialized automated market maker (AMM) system gives users more options and a better overall user experience (UI) when using a DEX.

  • Decentralized finance (DeFi) is a major growth sector in blockchain that offers peer-to-peer financial services and technologies built on Ethereum. DeFi exchanges, loans, investments, and tokens are significantly more transparent, permissionless, trustless, and interoperable than traditional financial services, and trend towards decentralized governance organizational methods that foster equitable stakeholder ownership. Platform composability in DeFi has resulted in unlocking value through interoperability with innovations like yield farming and liquidity tokens.

    Small Yield Monitor edit: …”peer-to-peer financial services an technologies built on Ethereum and other emerging blockchains…”

  • For blockchain networks and dApps, decentralized governance refers to the processes through which the disintermediated, equitable management of a platform is executed. It involves different methodologies for voting on platform tech, strategy, updates, and rules. Blockchain governance is typically conducted using two distinct systems: on-chain governance and off-chain governance. On-chain governance relies upon blockchain-based systems, typically using automatic cryptographic algorithms through the network’s computational architecture and underlying consensus mechanism. Off-chain governance refers to decision making that is not codified on the blockchain, often on online forums or face-to-face.

  • A decentralized system is a conglomerate of connected, but separate entities that communicate with one another without a central authority or server. They stand in contrast to centralized systems, which feature a central point of governance. Blockchains are an example of a decentralized system: the data ledger of a blockchain is distributed amongst all the decentralized network participants (nodes), which must achieve consensus on the content of the data for the network to function. Without a single point of authority, decentralized systems like blockchains also lack a single point of failure, which means that a single damaged node cannot incapacitate the blockchain as a whole.

  • A smart contract is a self-executing code or protocol that carries out a set of instructions that is verified on the blockchain. These contracts are trustless, autonomous, decentralized, and transparent; they are irreversible and unmodifiable once deployed. While they have several use cases, some of the most popular are various financial contracts (loans, derivatives, trading). They can also be used for legal contracts, identity management, and numerous other use cases. Popular in decentralized finance (DeFi), smart contracts can be bundled into decentralized applications (dApps) to execute more complex functions.

How does Decentralized Finance (DeFi) actually work?

We’ll let one of our favorite cryptocurrency YouTube authors, CoinBureau, explain DeFi, Smart Contracts, why it matters, and why we should all be paying attention.

Crypto Wallets: An Overview

By now you’ve moved money from your traditional bank, onto a centralized exchange (CEX) like Coinbase or Binance. You’ve purchased cryptocurrency and can see it in your portfolio dashboard on your chosen CEX. You’re ready to move those crypto funds off of the CEX, and into your own, personal, private crypto wallet. Take a deep breath: there’s a fair bit to cover here, but it’s not as scary as it will seem. We have some more terms to learn.

  • A blockchain is a public ledger of transactions that is maintained and verified by a decentralized, peer-to-peer network of computers that adhere to a consensus mechanism to confirm data. Each computer in a blockchain network maintains its own copy of the shared record, making it nearly impossible for a single computer to alter any past transactions or for malicious actors to overwhelm the network. Sufficiently decentralized blockchains do not rely on centralized authorities or intermediaries to transact globally, securely, verifiably, and quickly, making technology like cryptocurrency possible.

  • A block explorer is a software interface that enables users to access real-time blockchain information like transactions, blocks, addresses, nodes, and balances on a particular network. Operating as web browsers for blockchains, the many free-to-use and open source block explorers are essential in providing for global transparency and democratized access to blockchain networks.

  • The fees associated with transacting and executing smart contracts on the Ethereum blockchain are referred to as gas. Decentralized applications (dApps) on the Ethereum blockchain run using smart contracts that lay out rules for execution of events. The execution of events happens through transactions, which come with a cost to the network. These costs are figured based on the computational power required for each action and how long each action operates. Gas costs are denoted in gwei, a denomination of ether (ETH), equal to 0.000000001 ETH. Gas was built into the system to allocate resources to the network of miners who validate transactions and create new blocks. Gas also acts as a spam mitigation tool. By adding a cost to each transaction, nefarious actors who might try to disrupt the system by sending a large number of tiny transactions are deterred from doing so.

  • Gas fees are payments made by users to cover transaction or smart contract execution costs on the Ethereum blockchain network, in compensation for the computing energy that such executions require. Gas fees are generally priced in a small amount of the cryptocurrency ether (ETH). The sender of a transaction can decide if they want the transaction to be sent slowly or quickly. The faster the transaction is processed, the more gas fees it will require.

  • Ethereum charges a fee, called gas, for the computational exertion needed to send a transaction on the network — and the gas limit is the highest fee that the Ethereum network can charge a user. The gas limit depends on the complexity of the transaction, the chosen sending speed, and the current level of network congestion at the time the transaction is initialized. Because the Ethereum network is so large, thousands of transactions are often queued and awaiting confirmation, which results in network miners prioritizing transactions for users that pay more to send their transaction.

  • Within the context of blockchain technology, a token generally refers to a unit of value for a programmable asset that is managed by a smart contract and an underlying distributed ledger. Tokens are the primary means of transferring and storing value on a blockchain network — most often Ethereum. Tokens can also be designed to be either fungible or non-fungible, depending on a network’s specific needs. And while many tokens are primarily used for simple transactions, an increasing number of blockchain projects are designing tokens encoded with a variety of wide-ranging use cases, primarily in regards to on-chain governance and network maintenance.

  • Transaction fees are the fees charged to execute a transaction on a blockchain, and are typically charged to the sender. Transaction fees are required to pay for the computational power a network must exert to broadcast and send a transaction. Transaction fees, which can be paid out through various mechanisms to entities that furnish a blockchain network’s transactional capacity, are a key aspect of incentive models for most networks, including Bitcoin and the current iteration of Ethereum (1.0), upon which the fee is called “gas.” Transaction fees are charged every time a person participating in the network sends a cryptocurrency or specific type of data from one recipient to another. Transaction fees vary with each blockchain and often fluctuate according to the total transaction volume currently taking place on a network.

  • A transaction ID, or transaction hash, is an immutable record of a digital transaction that’s been recorded onto a blockchain ledger. Users are able to look up any past transactions using its corresponding transaction ID, typically with the help of a blockchain explorer. In some instances, a cryptocurrency recipient may request the transaction ID from the alleged sender in order to verify the transaction’s origination point.

  • A transaction’s settlement time refers to the elapsed time between when a transaction is initiated and when assets are deposited in the recipient’s account after all relevant financial institutions and/or algorithmic protocols confirm the transaction as valid. The length of settlement times vary widely depending on the structure of the different networks and organizations that process the transaction.

  • In a blockchain context, a transaction (TX) generally refers to the sending and receiving of different types of data between users on a blockchain network. Depending on their origin, transactions can be sent with varying speeds and levels of security and privacy. The most common type of transaction simply allows users to exchange network-specific tokens between each other. For example, Bob sends Linda four ether (ETH) using the Ethereum network, which she promptly receives a few minutes later. In exchange, Linda then sends Bob an equivalent value in bitcoin (BTC) via the Bitcoin network.

For the sake of clarity and simplicity in this tutorial, we are going to only focus on one crypto wallet: MetaMask. It’s one of (perhaps “the”) most popular wallet at the time of writing this piece. There are a lot of other options — many of them are fantastic. We will cover crypto wallet comparisons in a dedicated article soon.

What is MetaMask?

MetaMask is a software cryptocurrency wallet used to interact with the Ethereum blockchain. It allows users to access their Ethereum wallet through a browser extension or mobile app, which can then be used to interact with decentralized applications. Visit MetaMask directly: https://metamask.io/ — here’s their explainer video. 

Install MetaMask safely on your web browser (Chome, Brave, etc.)

If you haven’t familiarized yourself with crypto content creators on YouTube: prepare yourself. It’s a rapidly growing community and there are many great content creators (and many poor ones). It’ll take some time to get aquainted with “good” YouTube personalities and discover the ones you should avoid. We will create a blog post in the future that highlights some of our favorite, trusted crypto content creators on YouTube.

CoinBureau has a great tutorial on MetaMask and setting it up properly in your browser.

Write down your seed phrase and store it somewhere safe. Do not share your seed phrase with anyone. Write down your seed phrase and store it somewhere safe. Do not share your seed phrase with anyone. Write down your seed phrase and store it somewhere safe. Do not share your seed phrase with anyone. Got it?

Your MetaMask wallet is created — now what?

Let’s assume you watched both the MetaMask and CoinBureau videos above, and you have a basic understanding of MetaMask as a crypto wallet, and how it works as a browser extension as shown by CoinBureau. You’re in control of some cryptocurrency value: it’s stored in your private wallet, and only you have the private seed (“key”) phrase.

You’re now experiencing your first moments in Decentralized Finance (DeFi). Welcome to the future of money.

We need to pause — again — and make a few points clear:

1

Adding Funds

CoinBureau’s tutorial shows how you can buy cryptocurrency within the MetaMask wallet. It’s more common to buy your crypto on the CEX (like Coinbase) and send it directly to your MetaMask wallet. It’s usually cheaper this way, too. Once your MetaMask wallet has crypto in it, you can then navigate to a Decentralized Exchange (DEX) and swap your crypto for alternative tokens.

2

Bridging Assets

CoinBureau mentions moving assets from Ethereum blockchain to Binance blockchain. This is called “bridging” and there are multiple ways to accomplish this task. As a newcomer to DeFi, you may want to ignore this aspect for now, while you settle in. That’s perfectly fine — stick with Ethereum DeFi platforms (dApps, per the glossary above) for now. We’ll cover bridging later.

Here’s a great, quick video that explains how to send your crypto from the CEX (like Coinbase) to your crypto wallet (like MetaMask).

As mentioned, this is often an easier, cheaper way to fund your crypto wallet. If your MetaMask wallet already contains cryptocurrency, you can skip this video. As Cora explains in her video, sending a test transaction is always a great idea — especially if you’re new to DeFi and/or using a new wallet address for the first time.

Using a Decentralized Exchange (DEX)

As we’ve mentioned: for the purposes of this introduction, we’re going to stick with the Ethereum network. We will discuss bridging to other networks in a future post. One of the biggest DEXs in the Ethereum ecosystem is Uniswap.

Uniswap (https://uniswap.org/) allows users to connect their wallets, find their desired cryptocurrencies (tokens) and make an exchange: selling a token they have for an equal value of their desired new token. DEXs like Uniswap offer crypto investors and traders a much, much wider range of tokens. Many tokens are not offered on CEXs and must be traded or purchased using a DEX like Uniswap.

Scam Alert

We mentioned that, in DeFi, there is always a risk of scams and malicious parties who will try to get your seed phrase (“key”) from you. This is a great example. See the AD on Google’s search results? This is a fake Uniswap website. If you allow your MetaMask wallet to interact with this site, your funds will likely be stolen.

Here’s our friend, CoinBureau, again with a great tutorial video. This time, he’s covering the (real) Uniswap platform and how to use it with MetaMask. We’ll let him do the talking. We recommend watching this video at least twice to ensure the information really sinks in — especially if you are very new to crypto and DeFi as a whole.

There were a lot of new terms in this video. For clarity, we pulled a few that are important to really make sure you understand. Some of the concepts and terms you heard in this CoinBureau video are the foundational instruments for DeFi investing, so it’s important to know them well.

  • Lending pools are a type of liquidity pool designed to facilitate peer-to-peer (P2P) lending. When borrowing from a lending pool, users must provide ample asset collateralization. For example, if the collateralization ratio to borrow against USDC is 200%, and the user supplies $1,000 USDC, the user would be unable to borrow more than $500 USD. In turn, users who lend their assets are rewarded with a certain percentage of the total amount they lent. Smart contracts automate the lending and borrowing process with different predefined lending rates depending on the assets and protocols involved.

  • In regards to an asset, liquidity refers to the ability to exchange an asset without substantially shifting its price in the process, and the ease with which an asset can be converted to cash. The easier it is to convert the asset to cash, the more liquid the asset. With regard to markets, liquidity refers to the amount of trading activity in a market. The higher the trading volume in the market, the more liquid the market. Liquid markets tend to increase the liquidity of assets.

  • A liquidity provider is a user who deposits tokens into a liquidity pool. In return for supplying liquidity, users are typically awarded liquidity provider (LP) tokens that represent the share of the liquidity pool the user owns.

  • A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between those assets on a decentralized exchange.

  • A liquidity provider token (LP token) is a token that is created and awarded to a user that deposits assets into a liquidity pool. LP tokens represent the share of the liquidity pool that the liquidity provider owns. LP tokens are ERC-20 tokens that can be transferred, exchanged, and staked.

  • A liquidity aggregator accumulates liquidity from centralized and decentralized sources into one location to increase liquidity, reduce price slippage, and facilitate more efficient trading activity — particularly on decentralized exchanges (DEXs).

  • Within a financial context, slippage refers to the difference between the expected price of a trade relative to the actual price at which the trade is executed. Slippage generally occurs when an investor buys or sells an asset on a platform with poor liquidity and low trading volume. If there is a large gap between the bid-ask price on an exchange’s order book, the asset purchaser may end up paying more for an asset or receive less of the asset than expected once the trade has been executed.

Comparing Decentralized Exchanges

Other great Ethereum DEX options for new crypto investors.

Keep in mind: there are many growing blockchain ecosystems with their own popular DEX tools. We are simply discussing tools on the Ethereum network to keep things simple in this article. We’ll create more content around other, popular blockchains and their DEXs soon, and we’ll add a link here.

Sushi Swap

A great DEX with multi-chain capability and high liquidity. Offers some DeFi staking, earning options.

1inch

A very powerful DEX Aggregator. Offers excellent prices based on user swaps and very high liquidity.

Balancer

A well-respected, powerful DeFi tool with various investment offerings. Has a very clean swap feature.

Like centralized exchanges, there are many options and products offering decentralized finance (DeFi) exchange (DEXs) services. Like CEXs, there are pros and cons to all of them. Some are highly respected and supported by great teams and tech — some not so much. Many new crypto investors will experience issues navigating these waters — here is where some of those aforementioned battle scars may present themselves. Keep a few things in mind:

Ask for Help

Ask Telegram and Discord groups for help if you’re stuck. Watch YouTube videos to become familiar with the process.

Your Eyes Only

Never – never – give your private keys to anyone. Ever. If you lose or share your private keys, your money is at risk.

Always Test First

Run a small test transaction when using new DeFi products, or sending money to and from new cryptocurrency wallets.

Additional resources for understanding Liquidity Pools and LP Tokens.

Did you add crypto to a Liquidity Pool? You’re a DeFi investor now. But there’s more opportunity for you. Let’s pause on the DeFi topic, and move sideways to take care of our “B” readers: the Moderate Risk folks. Moderate Risk investors may prefer CeFi (or CeDeFi) investing over full-blown Decentralized Finance (DeFi).

Defining & Comparing: CeFi, CeDeFi, and DeFi

By now you’ve moved money from your traditional bank onto a centralized exchange (CEX) like Coinbase or Binance. You’ve purchased cryptocurrency and can see it in your portfolio dashboard on your chosen CEX. You’ve tested a transaction or two with your MetaMask wallet. You’ve probably made a small swap or two on a major DEX, like Uniswap or SushiSwap.

If you’re eager to dive deeper into various blockchains and the DeFi products built upon them, awesome. That’s coming up next. But we need to cover CeDeFi first. Many regard it as the middle ground between CeFi (storing your crypto on a centralized exchange, where you don’t control your keys) and DeFi (where you are in total control of your funds).

We need another small round of definitions so we keep things extra clear. One or two of these terms should look familiar by now. A quick “thank-you”, again, to our friends at Cryptopedia for putting such a detailed glossary together.

  • Centralization refers to the consolidation of control, authority, and access by a person or group. In a blockchain context, centralization refers to the level of privilege and distribution of nodes verifying and managing the network. Blockchains relying on powerful ‘super nodes’ or nodes concentrated in a limited geographical area are considered more centralized.

  • Centralization refers to the concentration of power in the hands of too few. Centralization can lead businesses to a lack of transparency, efficiency, and balance and sometimes even result in the limited effectiveness of products and services. Centralized blockchains may distribute profits to a select few rather than allowing all potential users of the system to participate. A centralized blockchain structure may also stifle equitable governance and decision-making processes and promotes censorship and control of data, which are not favorable to the value a system should provide.

  • Centralized decentralized finance (CeDeFi) is a blockchain-based system that is a hybrid between decentralized finance (DeFi) and centralized finance (CeFi) meant to leverage the best of both models. CeDeFi was created to allow large CeFi organizations to make use of various DeFi financial instruments. CeDeFi was also designed to offer numerous types of financial products and services that are not normally available through traditional DeFi. CeDeFi blockchain protocols also help large enterprises better adhere to strict regulatory and compliance issues, allowing them to operate more smoothly.

  • Centralized Finance (CeFi) is often thought of as a bridge between traditional finance (TradFi) and modern financial applications like blockchain and financial technology (FinTech). CeFi enterprises generally operate using a centralized governing body that controls users’ funds. Although numerous interpretations of what CeFi encompasses exist, centralized exchanges (CEXs), cryptocurrency asset custodians, and numerous FinTech applications like payment service providers are typically considered to be CeFi. CeFi service providers are often characterized as easy-to-use and heavily regulated with low fees. However, because they are centralized, they are potentially susceptible to a single points of failure.

  • A decentralized application — or dApp — makes use of blockchain technology to address use cases ranging from investment to lending to gaming and governance. Although dApps may appear similar to web applications in terms of user experience (UX), dApp back-end processes eschew centralized servers to transact in a distributed and peer-to-peer fashion. Rather than using the central Hypertext Transfer Protocol (HTTP) to communicate, dApps rely on wallet software to interact with automated smart contracts on networks like the Ethereum blockchain.

  • Decentralization is in many ways the central and defining characteristic of blockchain technology. Applying decentralized processes and tech can reduce or even eliminate the role of intermediaries across industries and use cases. For example, by removing banking institutions from financial instruments, decentralized finance (DeFi) platforms can distribute profits and governance to users and the wider community rather than a centralized intermediary. On an even more foundational level, decentralized networks crowdsource consensus, making it much harder for any one entity to control or censor the data that transacts through that network. However, many experts believe that achieving optimal decentralization can tend to decrease network throughput.

  • Decentralized finance (DeFi) is a major growth sector in blockchain that offers peer-to-peer financial services and technologies built on Ethereum. DeFi exchanges, loans, investments, and tokens are significantly more transparent, permissionless, trustless, and interoperable than traditional financial services, and trend towards decentralized governance organizational methods that foster equitable stakeholder ownership. Platform composability in DeFi has resulted in unlocking value through interoperability with innovations like yield farming and liquidity tokens.

Let’s watch this short video that explains the same ideas as well — it’s a bit easier to digest.

Comparing CeFi Platforms

Celsius: A growing leader in CeFi (or CeDeFi, depending on your opinion of the definition) with a growing list of features and token offerings.

Celsius has been rising in popularity throughout 2020 and 2021. It has a very user friendly mobile app, and recently (late 2021) released an initial version of a web app. Celsius, as you would expect, does require KYC for a user to gain full access to the app and it’s staking / lending opportunities.

Celsius is an attractive tool for crypto investors who don’t want the extra (sole) responsibility of handling their money with full-blown DeFi. If you prefer a team to manage and safeguard your funds, Celsius is a great choice.

For mobile-first investors, having a Celsius account offers an easy, safe platform to “park” some of your crypto assets like Bitcoin, Ethereum, and stablecoins like USDC to gain attractive interest rates. Even if you stake your assets temporarily, Celsius’ interest rates are worth considering. Additionally, the APY is higher for investors who hold part of their portfolio in Celsius’ native token, CEL.

Comparing CeFi Platforms

Nexo: another excellent middle-ground CeFi (or CeDeFi, depending on your opinion of the definition) interest earning platform.

Nexo is another fantastic, globally enjoyed platform for staking, lending, and borrowing of cryptocurrencies. Like, Celsius, US investors are able to use the platform but are required to complete KYC verification. If you’re a conservative to moderate investor, KYC verification should be something you expect with virtually any investment platform. Like most centralized exchanges, Nexo can provide transaction history and tax-reporting documents, which make the process much much easier for those reporting income annually.

Another exciting feature on the way is the Nexo Card. Discover all the benefits here.

Also like Celsius, Nexo has a native token (NEXO) that, when held and staked in the platform, allows users to access a higher tier of reward APYs. Holders of the token will soon be able to participate in governance voting. We’ll learn more about that in a future post.

Like the other platforms we’ve covered, Nexo has a great mobile app, too. Users can stake or lend tokens, or borrow against them right from the app. Nexo also offers in-app swapping, which makes Nexo a legitimate option for “one-stop-shop” crypto transactions and investing: especially if you’re only interested in trading the “top” cryptocurrencies like Bitcoin, Ethereum, Polkadot, Cardano, and the like. See Nexo for a full list of supported tokens.

Comparing CeFi Platforms

BlockFi: a US-based CeFi (or CeDeFi, depending on your opinion of the definition) platform working very hard to stay competitive in the space

To be clear: BlockFi is, for all intents and purposes, a solid platform and product. At various times in 2021, however, there has been some regulatory uncertainty about BlockFi’s operational status in some American states. BlockFi has set up a dedicated, detailed page explaining these issues and current developments — read it here. Despite the mid-year legal questions, BlockFi remains operational, competitive, and popular among crypto investors. Additionally, BlockFi has released one of the first cryptocurrency rewards credit cards (most products are debit cards), which has given them a great deal of attention. Once you create an account, you can apply for the credit card.

A notable benefit with BlockFi: users do not need to hold a BlockFi token to access these (or higher tiers of) interest rates — simply “deposit and go”. Additionally, the simplistic user interface and dashboard at BlockFi makes it a great option for newer investors looking for basic exposure to crypto.

With regards to its competition, BlockFi’s interest rates are on the lower side. BlockFi (at time of writing) offers 9% APY on USDC and 4.5% APY on Bitcoin. Despite lower rates, most Ce/De/CeDeFi investors will tell you that having multiple accounts and spreading out your money is a safe, wise choice. Additionally, knowing that BlockFi is headquartered in the US offers some comfort for more conservative investors, as US regulations and compliance requirements are very strict.

Comparing CeFi Platforms

Voyager: a US-based, publicly traded (TSX: VOYG), CeFi (or CeDeFi, depending on your opinion of the definition) mobile app quickly gaining ground.

Voyager’s mobile app is currently available to US residents (except for New York) only. However, Voyager reports they are actively working to open the doors for New York and international residents as quickly as possible.

Part of what makes Voyager such a fast-growing platform is the ever-expanding array (60+ at time of writing) of supported tokens. Like some of its competitors, Voyager has its own native token. Those who own VGX tokens get increased rewards for their staked cryptocurrencies.

Like it’s competitors, Voyager makes earning interest on your cryptocurrencies quite simple: deposit, stake, and your interest rewards start flowing. As while all platforms, monthly rewards and interest rates may change. Voyager makes it easy to track their monthly reward offerings — view it here. And, just like Celsius, Nexo, and BlockFi, the Voyager mobile app is well-designed and makes buying, swapping, and staking quite easy for most users.

CoinBureau offers a pretty great comparison of a few platforms — three of which we highlighted above. Note: this video was made in May, 2021. We felt it was still worth sharing, as his perspectives still hold true.

Farewell, moderate-risk cryptocurrency investor “B”

Remember our question at the beginning? If you feel content with owning popular, tier-1 cryptocurrencies like Bitcoin, Ethereum and some newer, emerging cryptocurrencies — and you’re comfortable storing, loaning, or staking them on centralized products and services, here’s where you can get off the “tutorial bus”. Thanks for being here — best of luck to you.

A

Conservative

I just want to buy bitcoin and hold it for 20 years. I don’t want to manage money or track projects or my investments.

B

Moderate

I’m willing to invest my assets in centralized platforms to earn good returns. I’m willing to learn how to move funds around.

C

Aggressive

I’m willing to fully manage my funds and keep track of their allocations on various chains. I want to hear high returns.

Decentralized Finance (DeFi): Highest Risk, Highest Reward (it’s not that scary)

You’ve made a lot of progress so far — you’ve experienced a lot of exciting moments throughout this post:

  • creating your first CEX account(s)
  • creating your first crypto wallet (MetaMask)
  • funding that wallet via your first crypto transaction
  • creating your first CeFi account to stake and earn interest
  • learned a LOT of new terms along the way
  • met a top-shelf crypto YouTube personality (CoinBureau)

And now, hopefully, you’re feeling confident enough to dip a toe into the sacred waters of Decentralized Finance (DeFi).

Let’s Widen Our Gaze

Throughout this guide, we have shown tools and workflows using only the Ethereum network. As a cryptocurrency investor, you are aware that there are other blockchains. Many have their own growing (an indeed, financially rewarding) DeFi products and communities within them. To help articulate the opportunity of DeFi, we will now expand the conversation to include other blockchains. In addition to Ethereum (ETH), we may discuss networks such as Fantom (FTM), Avalanche (AVAX), or Polygon (POLY).

One more round of definitions! Again, you may see some familiar terms here. Better to read them twice and be extra clear. Thanks again to our friends at Cryptopedia.

  • In regards to an asset, liquidity refers to the ability to exchange an asset without substantially shifting its price in the process, and the ease with which an asset can be converted to cash. The easier it is to convert the asset to cash, the more liquid the asset. With regard to markets, liquidity refers to the amount of trading activity in a market. The higher the trading volume in the market, the more liquid the market. Liquid markets tend to increase the liquidity of assets.

  • A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between those assets on a decentralized exchange.

  • A liquidity provider is a user who deposits tokens into a liquidity pool. In return for supplying liquidity, users are typically awarded liquidity provider (LP) tokens that represent the share of the liquidity pool the user owns.

  • A liquidity provider token (LP token) is a token that is created and awarded to a user that deposits assets into a liquidity pool. LP tokens represent the share of the liquidity pool that the liquidity provider owns. LP tokens are ERC-20 tokens that can be transferred, exchanged, and staked.

  • A smart contract is a self-executing code or protocol that carries out a set of instructions that is verified on the blockchain. These contracts are trustless, autonomous, decentralized, and transparent; they are irreversible and unmodifiable once deployed. While they have several use cases, some of the most popular are various financial contracts (loans, derivatives, trading). They can also be used for legal contracts, identity management, and numerous other use cases. Popular in decentralized finance (DeFi), smart contracts can be bundled into decentralized applications (dApps) to execute more complex functions.

  • Staking is the process through which a blockchain network user ‘stakes’ or locks their cryptocurrency assets on a network as part of the consensus mechanism, thus ensuring the security and functionality of the chain. Staked assets are usually held in a validator node or crypto wallet, and in order to encourage staking most projects reward the holders of staked tokens with annualized financial returns, which are typically paid out on a regular basis. Staking is a core feature of Proof-of-Stake (PoS) blockchain protocols, and each blockchain project which incorporates a staking feature has its own policies for staking requirements and withdrawal restrictions.

  • A staking derivative is a financial instrument that is typically employed within specific types of decentralized finance (DeFi) blockchain protocols. Staking derivatives leverage staking, or the deposit of assets into a blockchain protocol to accrue regular financial rewards, in a derivative form, usually through a Proof-of-Stake (PoS) blockchain protocol. Staking derivatives are often given a prefix in front of the traditional token name, such as “cTokens” that represent other assets like ETH (in the form of cETH) within the Compound blockchain.

  • On a Proof-of-Stake network, staking pools allow multiple cryptocurrency stakeholders to combine tokens in a collective pool in order to secure the benefits held by a larger, collectivized network stake. By combining computational resources, the individual stakeholders who choose to participate in a staking pool aggregate their staking power to more effectively verify and validate new blocks, which consequently increases their chances of earning a portion of the resulting block rewards.

  • Within the context of blockchain technology, a validator is an entity responsible for verifying and approving transactions submitted by users and/or blockchain clients. Each blockchain protocol has its own parameters for what constitutes an acceptable validator and how these validators operate. Most decentralized blockchain networks rely on some form of validator node to process on-chain transactions in a permissionless and distributed manner.

  • Yield farming is the practice of staking or locking up cryptocurrencies within a blockchain protocol to generate tokenized rewards. Many decentralized finance (DeFi) projects rely on yield farming to incentivize users to contribute to the network’s liquidity and stability, since these projects do not rely on a centralized market facilitator.

Now, let’s put these terms into usable context. How will you, the investor, actually interact with the DeFi products you see online? As we discussed earlier, DeFi protocols run on Smart Contracts. With your funds in your crypto wallet (MetaMask), you’ll approve the Smart Contract within the DeFi product you’re visiting (on their app/website). Once approved, you’ll be able to add, exchange, stake, or farm your crypto as you please. Depending on the DeFi platform, you’re likely going to be doing three “main” activities:

1

Staking

In Staking, a user delegates their tokens to a Validator. This secures the network, and users are rewarded with tokens.

2

Liquidity Pool

As a Liquidity Provider, you “donate” your tokens to a community pool. Other investors can use that liquidity for trading.

3

Yield Farming

With LP tokens, you can then “farm” them to the same, or other, DeFi platforms and earn that platform’s native token.

Yield Farming — Let’s Draw This Out

Here’s a hypothetical scenario, using a fake DeFi product for good measure.

Let’s suppose you have $100 of USDC and $100 of Bitcoin in your MetaMask wallet. You arrive at Yield Monitor Finance (a fake name) and want to start yield farming within our platform. Here is one depiction of how your experience might work.

Yield Farming — Let’s Video This Out

Now let’s watch some YouTube folks explain this to us.

Let’s spend one more video with Coin Bureau. He’ll be explaining a few major elements of DeFi: Liquidity Mining and Yield Farming, which we just defined above.

To make sure things are explained as clearly as possible, we wanted to include a second video, too. This one, from YouTube author: The Bitcoin Express.

At the risk of sharing too many explainer videos, we thought it would be worth embedding this popular video by YouTube author Finematics, too.

One more video by Shrimpy, a social crypto portfolio tracking tool, explains the differences between cryptocurrency Staking and Yield Farming.

Popular DeFi Platforms

Consider trying these great DeFi products.

There are a growing number of blockchains and thriving ecosystems within all of them. Yield Monitor tracks over 50 DeFi products — and we’re adding more every day. A few of of the most popular DeFi platforms are shown below. Note: we’re not playing favorites — these are simply good products, on good networks, with talented teams, and very large communities. By all accounts, these are “excellent” DeFi tools to have a great first DeFi & Yield Farming experience.

Trader Joe calls itself a “one-stop decentralized trading platform” on the Avalanche network. They combine DEX services with DeFi lending to offer leveraged trading. Staking, liquidity pools, and yield farming (and their native token, JOE) have been highly successful tools.

SpookySwap is the largest DeFi platform on the Fantom (FTM) network. It describes itself as an “All in one decentralized exchange for leveraging diversified funds across ecosystems, with the speed of Fantom [network].” Swapping, staking, yield farming, and cross-chain bridging (provided by AnySwap) is a pleasure on SpookySwap.

Beefy Finance is one of the top “auto-compounder” tools in DeFi. As the term implies, Beefy Finance automatically compounds your DeFi yields for you, which is a very convenient — and profitable — feature. While products like Beefy are very well-built and heavily tested, they do carry “extra risk” because it is a second “tech layer” on top of the existing DeFi protocol. However, sometimes the returns are simply too good to ignore.

A Note to Readers

As a portfolio tracking and on-chain data dashboard, Yield Monitor naturally focuses on more experienced DeFi investors and product developers. Most of our communication and features are created under the assumption that the reader is well-versed in cross-chain activity. This article was written for inexperienced DeFi users and cryptocurrency newcomers. We feel strongly that the success of this new financial system we love so much can only survive through mainstream adoption and acceptance. We aim to be a trusted resource of knowledge, access, and encouragement to those curious about cryptocurrency. We hope to build more content suited for beginners, and hope you’ll provide feedback that helps us continue to do so clearly and effectively. We’re grateful for your help.
Links contained in this article may include referral codes. Yield Monitor may receive a small reward (example: $10 in Bitcoin) for users who create accounts on exchanges using our referral code. We have no knowledge of who – if anyone – uses our referral codes. Any referral bonuses we receive will help fund Yield Monitor product development. We appreciate your support.

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