Section 1 : what is decentralized finance?
Decentralized finance (DeFi) is an ecosystem of financial tools that are built on the Ethereum (and others) blockchain. For the purposes of simplicity, we will be focusing on Ethereum for this guide — as it’s by far the biggest DeFi ecosystem.
The primary advantage of DeFi is that it’s trustless, and unregulatable. The recent drama within traditional financial markets has shown how much we can’t trust the institutions to fairly manage financial tools.
DeFi platforms cover a massive range of different functions, and are always evolving. These dApps (decentralized applications) facilitate such things as trading, borrowing, lending, insurance, and more.
The example I will use in this article is $MIR / Mirror Protocol — which I think will be the most immediately interesting project on DeFi for a lot of newcomers. This is because it allows for the decentralized trading and clearing of “synthetic” assets, notably : stocks. What this means is that the user can trade stocks on a totally decentralized exchange — one that doesn’t have the ability to limit your buying or selling at the whim.
Section 2 : the absolute basics
For this article, I’m going to assume that you’ve made your way onto a centralized exchange (known in short as a CEX, like Coinbase or Binance) — these can be useful as FIAT currency on-ramps, to get you started trading on DeFi.
Once you have some money on a CEX, then what you need to do is buy some Ethereum ($ETH) : this is what you’ll often use to purchase tokens throughout the ecosystem, and, most importantly, what you’ll use to pay for transactions on the network (referred to as gas fees.)
Setting up an Ethereum wallet
After you’ve acquired some $ETH, it’s time to set up your own Ethereum wallet to hold them in. This will act as your account for all Ethereum based tokens, and will be allocated a unique address that will serve as the identifier for you when transacting from this wallet.
In order to a create a wallet, you must download a wallet application, or extension in this case. For the example, I will be using Metamask : which can be downloaded HERE.
Once you have it downloaded, you’ll be prompted with the option to create a new wallet. Write down the seed phrase and store it in a secure place.
After you have completed setting up your wallet, you should see a drop down menu like this (if using the extension) :
It’s fairly self explanatory, in what is displayed. The only thing that isn’t immediately intuitive is that the address of your wallet is displayed in the top middle under “Account 1” — simply click this to copy it to your keyboard. This acts as a unique identifier for your wallet, and will show up on every transaction you make.
Loading Ethereum onto your wallet
Now that you have your Ethereum wallet set up, simply send $ETH from the CEX to your new wallet’s address (which can be seen in the top middle of the Metamask appliation, click to copy the full address.)
Making a purchase
To buy a token, you need to use what’s called an Automated Market Maker (AMM). These allow any project to list their token, without centralized oversight. The most commonly used one is called Uniswap, and it’s what we’ll use in the example.
The easiest way for beginners to find new projects, see information, and get access to the Uniswap pairing is via Dextools.io. On Dextools you’ll be able to search for projects mentioned and get quick access to useful links like their Telegram, Website, Twitter, etc.
So, let’s say we wanted to buy $MIR / Mirror Protocol : first thing people commonly do is find information regarding it from Dextools. So, navigate to dextools.io, and then search “MIR”, or alternatively paste the contract address (the unique address of the token contract, which should always be verified from a trustworthy source before buying.)
This token is a good example because it has two large liquidity pools available on Uniswap — UST & ETH. Liquidity pools are what you use to exchange tokens. Users & project teams fill the liquidity pool with equal amounts of two tokens (ETH & MIR, or UST & MIR, in this case) and you’re able to exchange back and forth using their token’s as liquidity. As an incentive for adding liquidity : projects often offer yield, and uniswap offers a percentage of fees generated to liquidity holders.
For this project, it’s actually better to use $UST to make exchanges, if you’re buying large quantities. But for now, let’s go into the $ETH/MIR pairing to see the steps to buy. After you choose this pair, you’ll see some token info on the top left, the tokens chart, and some recent purchases. Let’s focus on the info panel :
Let’s break down these buttons first (from left to right)
- Etherscan : this links to etherscan, where you’ll be able to check the details and record of the token.
- Unicrypt : here you’ll see if the project has locked liquidity (so they can’t remove it), how much, and for how long it is locked.
- Team Lock : shows tokens allocated to the team, and how long they’re locked for.
- Goingecko : a place to view more detailed information (but still easily digestible) on the token.
- Telegram : links to the project’s Telegram channel, a common place to communication about projects (although some use Discord too.)
- Twitter : link to the project’s twitter.
- Website : obviously, links to their website.
Other information is labeled, and should be understood easily. Next step to buy is to click the “Trade” button. This will take us to Uniswap (the AMM), and automatically populate the pairs, $ETH/$MIR in this case.
In the top right, you’ll see a button to Connect Wallet — once clicked you’ll need to authorize the usage on your Metamask wallet.
Then you’re ready to swap! But we need to talk gas & slippage first. . .
Section 3 : Wallet (Metamask) usage
The GAS FEE is how much you need to pay in order to make the respective transaction on the Ethereum network. The gas fee varies widely depending on the time of day, and the traffic on the network. GWEI is the price unit, and the price of gas needed to make a transaction can be seen HERE.
It’s important to be able to tweak the numbers, to speed up transactions effectively. To do this, go into Metamask settings and enable advanced gas control.
Once this is done, you’ll be prompted with this screen when making a transaction.
The starting Gas Price will be the suggested price for a normal-speed transaction. The higher the GWEI, the faster the transaction will be processed.
Essentially what slippage is, is the percent of an increased / decreased price that the transaction will be willing to take. So, if you have a 10% slippage, then the price can move 10% in either direction, and your transaction will still be processed. If it increases past this threshold, the transaction will be cancelled and gas spent for nothing.
This will be adjusted dynamically depending on how “hot” the token is, and how much the price is moving. But be careful, you can be “frontrun” but a frontrunning bot, if the slippage is too high — which will essentially steal some money from your transaction. (more on this later.)
In the metamask wallet, you’ll see your transactions that have been processed, or are processing still. Metamask will only process one transaction at a time. Clicking on one will bring you to Etherscan, to see details.
Under this tab, you’ll be able to see all the assets in your wallet. Just because something isn’t listed, doesn’t mean you don’t have it. Not all tokens are automatically added as you add them your wallet. To add something, you’ll need to contract address, and to paste it in as a “Custom Token” under “Add Token”
Section 4 : Learning Resources
The absolute best thing you can do as a novice to the DeFi space is to stay humble, and to spend time reading what more advanced users have to say. There are a lot of Telegram communities which will lead you astray, and many Twitter Influencers who will simply have you buy into a token to use you as exit liquidity (dumping their tokens on your purchases.)
The absolute only chat that I feel comfortable recommending is the Selective :
This is a chat which focuses on quality & safe projects exclusively. Chat is limited to only honest, and experienced DeFi investors.
It’s important to avoid the advice of “shillers” who are people who are simply paid to tell you to buy something. These people will be paid thousands of dollars to suggest whichever token pays the most, this is no guarantee of quality and often will just lead to losses and confusion.
Most importantly in the beginning is to absorb as much information as possible, and be SAFE.
Section 5 : Safety
DeFi is a high-risk high-reward enviroment, and the responsibility of managing your own assets comes with pros and cons. One of the downsides, is that you’re fully responsible to guard against potential pitfalls. So, I’ve gathered a small list of the most common things to look out for.
- Frontrunning Bots — These are bots that will “frontrun” your high-slippage transactions, by buying before you, and then selling after you. This makes it so you buy at a higher price, and they essentially steal the difference. You can avoid these by using as low of slippage as possible for all transactions.
- “Influencers” — There are a million people who want to take your money, not limited to Crypto. But most of the big names in DeFi are really just bandits. They are paid to “market” tokens by shilling them as good buys to their followers. I can say from experience, that these people will do little-to-no research into projects they support, and just take money to dump the project on their followers. Be careful with who you trust. (The Selective is filtered for only quality members, a good place to start)
- Scam tokens — Often when new projects are released, someone will create a token with the same name but a different contract. Buying into these fake tokens will result in a permanent loss of tokens, and can easily be avoided by verifying the contract from official sources.
- Direct message scams — Use common sense. No one is going to offer you a transaction that can be done in an official way with no issues, and no one will offer anything in which they lose. People get very creative, so beware.
Section 6 : Closing statement & Resources
DeFi is still in it’s infancy, and with the recent blatant unfair treatment of traditional finance — it’s ready to take a more prominent place in the world. With traditional banking & finance you’re hedged against other citizens of your country, but with DeFi you’re hedged against the government & bureaucrats who wish to limit you.
If you’re here from the Robinhood fiasco — check out Mirror Protocol; it’s essentially Robinhood without needing to trust anyone, and without anyone having the upper hand over you.
As a serious trader, it might be good to check out Unidex — which is aggregating all common trading tools onto a decentralized platform.
These are just two of hundreds of upcoming quality projects.
Remember : be humble, eager to learn, and cautious. You’re early. Don’t squander the opportunity.