Decentralised finance (DeFi) is a newly emerging financial system built on blockchain technology. This system uses automated programmes, which take on the role usually played by banks in traditional finance, or TradFi.
DeFi is an alternative to TradFi that allows users more control over their funds. It is decentralised, meaning control is distributed amongst stakeholders in the system, instead of centralised, which refers to one institution (e.g., a bank) being in control.
Other advantages of DeFi include availability to almost anyone with an Internet connection, low fees, and access to financial services like lending and borrowing.
You don’t need to be an advanced crypto trader to use DeFi applications, as long as you familiarise yourself with the basics. This beginner’s guide to DeFi covers the initial steps to help get you started on your DeFi journey.
Read our ‘What is DeFi?’ article to understand the building blocks of the DeFi system.
- Learn how DeFi Wallet gives you full control over your crypto assets
- Different tokens and coins can be used in DeFi. Learn about how to use them, their associated transaction fees, and the blockchains they operate on
- With DeFi, users can earn interest by providing assets to a liquidity pool, yield farming, and staking crypto
- An introduction to beginner-friendly DeFi projects that offer services including lending and borrowing, yield farming, or buying and selling NFTs
Step-by-Step Guide to Entering DeFi
Step 1: Setting Up Your DeFi Wallet
The Crypto.com DeFi Wallet is a great way to start your journey into DeFi. The first thing you need to do is set up your DeFi Wallet.
Once you’re finished setting up your DeFi Wallet, you have the option to connect it to your Crypto.com App account via the DeFi Wallet settings. If you are wondering why you would have two: They differ in type — custodial and non-custodial — and offer different functions.
A custodial wallet is centralised, meaning you only need to set up a username and password. But it also means you hold less responsibility over your assets, as they are managed by a third party. (To protect your funds, Crypto.com offers industry-leading security credentials and one of the industry’s largest insurance policies amounting to US$750 million.) It is a more user-friendly option; if you forget your password, our customer service team can help you access your account.
Non-custodial wallets — like the DeFi Wallet — gives you full control over your funds and private keys. You create a passcode and are issued a twelve-word recovery phrase. If you would like to further secure your wallet, set up biometrics and two-factor authentication. As you are the sole custodian of your assets, it is vital that you physically write this recovery phrase down and store it securely in an offline location (e.g., on a piece of paper or flash drive).
Check out these articles for further details on different types of wallets, as well as more information on how to securely back up your recovery phrase.
Now that you set up your DeFi Wallet, you can get started.
Step 2: Funding Your Wallet and Buying Tokens
How to Fund Your Wallet
Next, you need to fund your DeFi Wallet. You can do this by:
(1) linking a credit/debit card and utilising the ‘Buy’ option in your DeFi Wallet, or
(2) using an external wallet like the Crypto.com App through the ‘Send’/’Receive’ option
Please note that if this is the first time you are connecting (or reconnecting) your Crypto.com DeFi Wallet to your Crypto.com App, you will have to wait 24 hours before you’re able to withdraw any crypto from your Crypto.com App to your newly connected Crypto.com DeFi Wallet. This 24-hour lock applies only to withdrawals.
However, you can buy crypto with the Crypto.com DeFi Wallet immediately after connecting to your Crypto.com App account.
How to Purchase Tokens and Coins
The next thing you need to get started with DeFi is tokens and/or coins. What kind of tokens or coins you choose depends entirely on your goals. Tokens have different functions and benefits, and some can be used on more than one blockchain.
Read this article to learn about the difference between coins and tokens.
You can acquire and swap tokens directly on the Crypto.com DeFi Wallet App. Swap means to exchange one token for another. This feature is under ‘Swap’ and gives you the option to switch between tokens across six blockchains, including Ethereum, Cronos, and Crypto.org Chain.
You can also transfer crypto assets across different blockchains via the Cronos Bridge feature, which currently supports CRO transfers between the Crypto.org Chain and Cronos, as well as ATOM transfers between Cosmos and Cronos.
Learn about the types of tokens on different blockchains.
Transaction Fees for Tokens
Transaction fees in crypto are also called gas fees. Note that gas fees are always paid in the native token of the network that the transaction is taking place on. Think of it like a country’s currency: ETH for the Ethereum chain, AVAX for the Avalanche chain, MATIC for Polygon, and so on.
A common mistake that users may not be aware of is having an insufficient amount of the appropriate token in which to pay a gas fee, especially when it comes to tokens available for transfers on more than one network (also known as multi-chain tokens).
The Crypto.com DeFi Wallet supports three CRO assets on different chains, each requiring unique tokens as network fees:
- Transactions of native CRO on the Crypto.org Chain (CRO) require native CRO as network fees
- Transactions of CRO on the Ethereum blockchain (ERC-20 CRO) require ETH as network fees
- Transactions of CRO on the Cronos network (CRC-20 CRO) require CRC-20 CRO as network fees
Transaction times and network fees for these different types of CRO differ. For example, the gas fees on the Cronos network are significantly lower than those you’ll come across on the Ethereum chain.
Step 3: Learning the ‘How-To’ of DeFi Investments — Staking, Lock-ups, Lending and Borrowing, Farming, and Mining
Now that your wallet is funded with crypto, you can use it for DeFi. Lending and borrowing, staking, mining, and farming are the most common ways to interact with DeFi protocols.
Here is what these terms mean in detail:
Lending and Borrowing
Lending and Borrowing is one central element of any financial system. In DeFi, lenders (also called depositors) provide funds to the protocol and are able to earn a return on their funds that people borrow.
Because of instant availability, borrowers are willing to pay interest for assets to borrow. To borrow in DeFi, users need to over-collateralise. Overcollateralisation means the collateral’s value exceeds that of the loan borrowed — or simply, what you lock in is more than what you’re taking out.
Borrowers can use one token as collateral and receive a loan for another. In this way, users can farm yield (see below) with the borrowed coins and keep their initial holding, which may increase in value over time.
Staking & Lockups
Staking and lockups are temporary commitments of crypto assets. Staking refers to users committing a specific amount of tokens or coins to become a ‘validator’ in a Proof of Stake (PoS) blockchain network, while lockups refer to ‘locking up’ assets as liquidity on a DeFi platform in return for interest.
If you are interested in the technical details of validating blocks, find out more in this article on how the Proof of Stake consensus works.
If you don’t want to commit to becoming a validator yourself, users can also participate in staking via Delegated Proof of Stake (DPoS).
Staking pools allow people to lock up tokens into a pool to earn interest, based on the size of their deposit in the pool in relation to the pool’s total holdings.
DPoS allows everyday users to participate in staking by ‘delegating’ their virtual assets to a validator. In return, they receive rewards, while the validator fulfils the computing requirement on the blockchain.
A subset of staking, yield farming refers to a strategy involving lending or staking crypto assets to get rewards in the form of an annual percentage yield (APY).
You can also place LP tokens, which represent the amount of assets you have contributed to a liquidity pool, into a ‘farm’. This is another example of how you can be rewarded for your liquidity provision.
In finance, liquidity refers to how fast an investment can be sold while maintaining its value. In other words, the more liquid an investment is, the quicker it can be sold, and the easier it is to sell it for its current market value.
Liquidity mining is a subcategory of yield farming that adds functionality to the crypto community. By lending your assets to a decentralised exchange (DEX), you are providing liquidity and receiving rewards, which most often stem from trading fees that are accumulated by traders swapping tokens.
A liquidity pool usually comprises a pair of tokens, with a required value ratio of 1:1, with each pair creating a new market. Contributing to these pools makes you an LP, or liquidity provider. LPs need to contribute an equal value of both tokens to the pool.
As an example, if you deposited CRO and ETH into a liquidity pool, the pair gets swapped into a CRO-ETH LP token that represents the value of both currencies.
Every time a user makes use of the liquidity pool, they have to pay a small fee, which automatically goes to the Automated Market Maker (AMM). This is then paid out to LPs to the pool as a reward, proportional to the amount of liquidity they provided.
Step 4: Exploring DeFi Projects
After learning about the components of DeFi and purchasing the coins you need, explore projects where you can use them.
These projects are called decentralised applications (dapps). DeFi projects are software protocols running on top of a blockchain network (e.g., on Ethereum or Cronos).
Because of this, DeFi projects are also often called DeFi protocols. Which one is interesting for you depends on your goals. DEXs, lending platforms, and yield farming platforms are three good starting places for beginners.
Here are two beginner-friendly DeFi protocols on the Cronos network:
- Tectonic — A lending and borrowing platform that allows users to participate as liquidity suppliers or borrowers
Native token: TONIC — a governance token (a type of token that allows holders to vote on potential changes and help shape the future of a protocol)
- VVS Finance — a “Very, Very Simple” and easy-to-access DEX platform
Native token: VVS — a utility and governance token with applications throughout the VVS platform
You can access these and many more dapps through the ‘dapps browser’ in your DeFi Wallet.
Learn more about these two High Yield projects in this article.
DeFi is a new financial system with great potential that requires users to understand the how-to in order to make the best decisions.
You can start exploring the possibilities and utilising your crypto assets by downloading the Crypto.com DeFi Wallet. Our Help Centre article gives you a detailed guide on how to set up the wallet to get started.
For an overview of the Cronos ecosystem that hosts over 60 DeFi projects, check out this article. And if you are still confused by DeFi jargon, gain clarity with our explainer of 5 common DeFi terms.
Due Diligence and Do Your Own Research
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.