There are two worlds of crypto currency investments.
The first world is investing into bitcoins and alt coins through crypto exchanges like WazirX and Binance to make profits through day trading.
The second world is investing in the blockchain applications that drive crypto and actually use the systems that power the crypto coins.
Interestingly, you must have ETH tokens rather than bitcoins to invest in decentralized finance.
Bitcoins inspired the investors and bankers to invest in cryptos but ETH is actually becoming the backbone of decentralised financial applications.
Blockchain is evoling in the phases:
- Phase 1 – Heavy Investments into Bitcoins and Cryptos
- Phase 2 – Discovering use cases through Decentralized Finance
- Phase 3 – Moving the internet on Web 3.0
We are in between the phase 2 and 3.
Today, I am going to explain the real use of cryptocurrencies that will evolve the financial systems in the future – that’s known as Decentralized Finance (DeFi).
Means – Financial system running on the blockchain without the dependency on Government and Banking system.
You would need ETH tokens to invest in DeFi and that’s the best investment strategy for long term. If blockchain becomes successful after 3 to 5 years then ETH is going to be the most valuable crypto assets along with the token coins of successful DeFi applications.
DeFi applications work on ethereum network and we have to pay transaction fees in ETH, that is called gas fees. ETH prices would go high as the demand of ETH would increase in the future.
Short term stock & crypto traders don’t care about the fundamentals – they make money through daily movement of prices.
But long term investors expect huge profits in 5 to 10 years without worrying about daily price fluctuations. Long term investors don’t keep their crypto assets idle in exchange or wallet but lend through Aave to earn interest.
Stay with me till the end, I will walk you through the current financial system in India and then explain how to start with your first ETH investment in decentralized finance.
Disclaimer: The information is purely for educational purpose and not to be considered as investment advice. Investments in stocks & crypto are risky and you must do your own due diligence before investing. I am a stock & crypto lover and not an investment advisor.
Bank Accounts
We use banking accounts like HDFC, ICICI and SBI to receive salary, open FDs, online transfers and pay by debit cards.
Payment Apps
We have payment apps like Paytm, PhonePay and GooglePay to transfer money and make online payments. These apps are connected with our banking apps.
Trading Apps
We invest our money into mutual funds and stocks through apps like Zerodha, Upstox, Groww and 5Paisa.
Investment Trackers
We use additional apps like Investing, ETMoney and Groww to analyze and track the investments.
The crypto world has similar products and apps through which you can start using decentralized finance.
Decentralized finance applications are called Dapps.
Lending & borrowing
Explore Dapps like Aave, Compound and Oasis for lending and borrowing crypto coins.
Blockchain powered exchanges (Token swap)
The future of finance product exchanges belongs to apps like Uniswap, Matcha and 1inch.
Investment Dapps
You can invest your crypto investments through Token Sets and Index Coop.
Trading Dapps
Payment Dapps
What is DeFi
Decentralized Finance or DeFi is a common term for a universe of DApps (as shown above) that help you perform financial transactions in the crypto world.
Dapps help you use crypto as money to lend, borrow, save & earn interest, swap, invest, trade and pay for acquiring other cryptos.
Similar to transactions in the real financial world but in a decentralized way on the blockchain.
The control and decision-making are distributed to the network (People and Machines) rather than to a centralized entity (Governments, Banks).
Hence the name “Decentralized Finance”.
I must admit that decentralized finance is neither efficient nor cost-effective, but it’s evolving very fast. Don’t miss the opportunity at the early stage of DeFi evolution.
Long term investors can lend their crypto assets (Bitcoins, ETH) and earn interest through Dapps.
How DeFi Works Using Ethereum
Dapps are built on Ethereum – a decentralized, open-source blockchain having a smart contract functionality.
You can think of Smart Contracts like a legal stamp paper of the real world that is used to write agreements, deeds and affidavits.
Stamp papers are used by governments to enforce laws and agreements – Smart contracts are used by decentralized networks to enforce the agreements between two unknown parties.
Basically, smart contracts are computer codes written through Ethereum which are impossible to manipulate by humans or machines. The codes are universal and can be trusted by everyone.
Ethereum (ETH) is the backbone of Decentralised Finance.
How to Start DeFi Investment
I want you to play with DeFi by actually using it because just theory is not enough to understand the depth and power of decentralized finance which is going to rule the future of finance.
As the first step into DeFi, you should do:
#1. Buying Ethereum (ETH)
That’s because 92% of the DeFi applications are built on the Ethereum (ETH) smart contract and require you to pay fees for transactions known as Gas fees in ETH.
As a starting point, you need to buy ETH outright from any of the crypto exchanges.
You can use WazirX or Binance crypto exchange to purchase ETH.
WazirX charges a high 0.005 ETH fee which is about Rs. 1500 for withdrawing ETH to other wallets while Binance charges 0.003 ETH as transfer fees to other wallets.
You can not directly buy ETH using INR in Binance.
You can first buy ETH through WazirX transfer ETH to Binance which is FREE at the present moment. Binance has acquired WazirX and both can be connected to transfer assets to each other without any fees.
You will need to open both Binance and WazirX accounts.
Buy ETH on WazirX using INR and then transfer it to Binance and then to MetaMask wallet.
#2. Steps to open an account at Binance
Click here to open FREE Binance account. Create an account by filling your email id and selecting your password
Slide to complete the puzzle
You will be asked for account verification through OTP sent on your email ID
Account has been created. Click on “Go to Dashboard” for further instructions.
Complete security verification by providing Two-factor authentication (using 2 OTP’s – one sent on email and the other on your mobile).
#3. Open WazirX Account
You can directly deposit and withdraw the INR through WazirX.
1. Click on this link & Sign up for Free WazirX account
2. Fill Details to Start Creating Account
You need to provide your email address and create a strong password to start creating your WazirX account.
3. Email Verification and Account Security Setup
WazirX sends you an email for account verification on the email address provided by you. Just click on the verification received to proceed ahead with account creation.
Next, you need to set up your account security. WazirX offers two options for your account security.
- Google Authenticator App
- Mobile SMS service
You can choose either of the options. But the authenticator app is safer as compared to mobile SMS which is prone to delayed receipt and the possibility of SIM card hacking.
4. Select Country and Choose Account
In the final step, you need to select your country. You have the flexibility to open your account with or without KYC. You can only deposit and trade on your WazirX account without KYC.
I suggest you complete KYC as it may take some time for the documentation review and approval. You can withdraw money only after completing KYC.
For completing KYC you need to enter
- Full name as appearing on KYC document
- Date of birth
- Address as per the KYC document
Then you need to upload the scanned copy of your KYC documents and selfie. After which the account gets verified within 24-48 hours from WazirX.
#4. Link your WazirX and Binance accounts
Use the Connect Binance link that opens as below. And select login via Binance.
Click continue and the account linking will be done automatically.
Complete the Two-factor authentication with OTPs sent on mobile and email ID.
#5. Buying Ethereum On WazirX and transferring to Binance
Visit WazirX and open the exchange section.
Pick the INR pairs column and select ETH/INR pair. The chart will open on the right side.
On the bottom, you will see the Buy order form.
Fill in the amount of ETH that you want to purchase. I have filled Rs. 2000 and the system automatically give you the amount of ETH.
Click on the “Buy ETH” tab. The order gets placed on the WazirX exchange.
Once your order gets executed. You will receive ETH in your WazirX wallet.
#6. Transfer ETH to Binance
Next, you can select funds to transfer ETH to Binance. If you don’t have a Binance account, here is quick link to open Binance account.
The option will pop up to transfer ETH
WazirX will ask for a two-factor authentication to finish the transfer. Once done, you will receive ETH in your Binance account.
Click on the “Fiat & Spot” option on the left-hand side or from under the wallet to know all the crypto and money balances in your Binance account.
#7. Get a Crypto Wallet
Look for a crypto wallet that supports Ethereum and can connect to various DeFi applications through a browser.
MetaMask is the most popular Ethereum wallet because you get access to many DeFi applications directly from the Metamask itself.
Steps to get Metamask Wallet –
Click the “Download” option on the Metamask website.
I have used the option – Chrome. Scroll down and click the tab – “Add to Chrome” and follow instructions.
This will add an Ethereum wallet to your browser.
The MetaMask icon will appear on the browser on the top right of your window screen. Click on the icon to open the app.
You will be prompted to create a new password
Next you will get a secret backup phrase of 8 to 12 words. Keep the phrase securely because it will be required in case you forget the password.
Metamask will ask you to verify your secret backup phrase by writing in the box. After which your wallet will get created.
#8. Transferring ETH from Binance to Metamask wallet
Once you have the ETH in your Binance account. Send it to Metamask Wallet using the crypto address.
Steps to send ETH from Binance-
Open the MetaMask extension
Hover over the account name at the top of the window, which will display “Copy to clipboard”
Click on the account name. This will copy the receiving crypto address on your clipboard.
Go to the Fiat and Spot section on the Binance and choose Ethereum
Click on the withdraw option. And you will get a window shown below.
Paste the address in the space provided and click on the network. Here you have to select the ERC20 network because you are transferring ethereum.
Fill in the amount of ETH that you want to send and click on the “Withdraw” tab. Which will help you complete the transfer.
Now you are ready to use DeFi applications.
You may be asked to convert/ swap your ETH into some coins or tokens depending on the DeFi application that you want to use.
How to Use Dapps (DeFi Applications)
I have explained the procedure to use Aave (lending or borrowing) and Uniswap (token exchange). I will keep adding more Dapps to the list.
#1. Aave
You will learn to earn interest by lending against your cryptocurrencies with the Aave application.
Similar to a bank savings account
Powerful because Aave allows you to deposit your crypto assets to earn interest over a period of time. Which otherwise have been lying idle in your wallet.
The interest rates (APY) that you get range from 0.0% to as high as 18.30% depending on the crypto that you are depositing.
With Aave, you can also borrow from the liquidity pool by depositing crypto assets. The maximum borrowing amount will depend on the crypto value you have deposited and the available liquidity.
Aave does not require ID verification or KYC procedure to lend because it is a decentralized platform.
Below are the steps to lend crypto and earn some interest –
Check Aave Market with a range of assets like BAT, CRV, Dai, Link in which you can borrow or lend.
To deposit assets (i.e. lend) you need to have the crypto assets and ETH for paying gas fees.
For connecting your wallet click on deposit and select connect tab on the top right on the Aave screen.
Select Meta mask as the wallet option. The app will automatically connect to Metamask after taking your permission.
After getting connected to Aave select the Deposit option from the left-hand side window.
Select the crypto token (asset) that you want to deposit. For example, if you want to deposit DAI then select DAI.
On the next step, you will get a screen where you can –
- manually enter the amount of Dai that you want to deposit or
- select the percentage of your Dai holding that you want to lend. For example 25% of the total Dai that you have in your wallet.
Check gas fees and click on deposit. Once confirmed, your DAI will be transferred to the Dai liquidity pool on Aave.
In case you want to withdraw then click on the Withdraw button from the dashboard. Choose the amount of Dai that you want to withdraw and click withdraw button to complete the transaction.
The unique thing from Aave is – Flash Loans with any collateral.
Just as unsecured loans in banking terms.
Flash Loans allow you to borrow any available amount of assets without depositing any collateral. The condition is that – the liquidity is returned to the protocol within one block transaction.
The best part – In Aave V2 you can trade your deposited assets as collateral across all currencies supported in the Aave Protocol. Something which is not possible in the traditional financial world.
Look, you can exchange your assets on which you have borrowed to earn more returns and repay your loan.
Whereas in the real world, banks will not allow you to sell your house or jewelry and to use the proceeds to pay your loan.
Other Borrowing & Lending DeFi –
- For individuals –
- Compound – Provides loans and accepts deposit on crypto assets
- DeFiner – Offers 15+ digital assets lit BTC, USDT, ETH for borrowing lending and earning interest.
- ForTube – A lending platform with customized financial products
- For Corporates & Institutions –
- Maple – Provides institutions with capital by depositing cryptos in choice of managed pools
- Kava – Platform for corporates to lend, borrow, exchange, invest and earn on crypto assets.
#2. Uniswap
Uniswap is a decentralized on-chain crypto token exchange on Ethereum.
Anyone can quickly swap (trade) between ETH and any ERC20 token on the exchange or deposit your crypto assets (is supply liquidity to the exchange) and earn fees.
Uniswap exchange challenges the traditional stock/forex exchanges
Unlike a traditional exchange, you do not have brokers, there is no central exchange authority, and even no Limit order book.
You do not need to specify the prices at which you are willing to buy or sell ETH. Instead, Uniswap pools everyone’s liquidity together and makes markets according to a preset algorithm.
The algorithm is known as an automated market maker (AMM), which quotes prices to the end-user according to some pre-defined ruleset.
Other DeFi Exchanges and Trading Innovations –
- AirSwap – a peer-to-peer trading network powered by Ethereum
- Balancer – a non-custodial portfolio manager, liquidity provider, and price sensor
- BarnBridge – a derivatives protocol for hedging yield and market price
- Lien – a protocol for creating Options and Stablecoins out of ETH
- Mettalex – a decentralized commodity derivatives exchange
#3. Try swapping the coin (finding best rate)
Swapping is simply exchanging one crypto token into another. If your cryptos are not listed on the exchange then you have to swap.
The easy way to swap is using the inbuilt swap feature on the Meta mask wallet. Because meta mask provides best rates in 2 minutes after scanning from applications like Uniswap, Curve finance,1inch, Totle and others.
Suppose you want an Aave token in exchange of ETH in your account. Then you can select “Swap” on the Meta mask.
Select the crypto into which you want to swap. In our case it is Aave.
Enter the amount of ETH that you want to swap and proceed further.
Review the swap transaction before finally approving the swap transaction.
Once the swap is complete the ETH balance in your wallet will reduce and you will get a new Aave token in your wallet.
Final Words
Global financial institutions are beginning to accept DeFi and looking for ways to participate.
For example, 75 of the world’s biggest banks are trialing blockchain technology to speed up payments as part of the Interbank Information Network. The names include banks like JP Morgan, ANZ, Royal Bank of Canada including ICICI Bank from our country.
Slowly traditional financial organizations will shift to decentralized blockchain platforms.
That’s because decentralized finance opens you to a new financial system that makes it easy for you to control and access your funds and transact at the speed of light.
Plus you have a way to earn on your idle lying crypto asset.
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