How To Use DeFi Apps? Complete Guide [2024]
With the rise of DeFi or Decentralised Finance, customers availing services and products related to financial sectors have got a chance to directly get themselves associated with various services and products linked to the financial market without any third party interference. Learning how to use DeFi apps allows people to create income streams, lend, borrow, and trade various cryptos. In this blog post, I will explain how to use DeFi apps with reference to computational examples so that readers can become familiar with the use of apps in this new area of innovation.
Setting up a Crypto Wallet for Defi Apps
To begin getting familiar with DeFi applications, one needs to create a crypto wallet compatible with them. Each DeFi app runs on a blockchain platform, but Ethereum is the most famous blockchain for such apps. Hence, you will require a wallet that can effectively engage with the applications on the Ethereum platform that include Meta Mask, Trust wallet, or the Coinbase wallet.
For instance, some of the most commonly used browsers include MetaMask since it is simple to work with, and compatible with most apps that are located in DeFi. MetaMask can be obtained from their website, installed in the browser, and a new wallet has to be created from scratch. During the set up, you will be provided with a seed phrase that should be kept safe because there is no other way of regaining access in the event that you lose your wallet.
Once you have your wallet, you must deposit Ether (ETH) to your wallet so as to enable you pay transactions fees and engage in DeFi activities. ETH can be bought from any exchange that deals in cryptocurrencies such as Binance or Coinbase then transferred to your MetaMask wallet using the wallet address which is obtained from MetaMask. This process is recognized as most of the DeFi apps are ETH-based, and require ETH for their operations and interactions.
Linking Your Wallet to a DeFi App
Having created the wallet and funded it, the next thing to learn about how to use DeFi apps is how to link your wallet to the DeFi app you wish to use. This enables the app to be able to directly communicate with your wallet and make transactions on your behalf.
For example, Uniswap – the most famous DE, which lets users exchange tokens in their wallets without going to an exchange. To connect your MetaMask wallet to Uniswap, open the Uniswap website and go to the ‘Connect Wallet’ button – choose MetaMask among the wallets available, and the MetaMask extension will ask for the permission to connect to Uniswap. Once you have got connected, you will be in a position to begin exchanging tokens, trading the tokens, or you will be trying out all of the other functionalities that will be offered by Uniswap.
In the same way, if you wish to trade using Aave, which is one of the most popular lending and borrowing protocol, the steps are identical. Upon being done, scroll to the main website of Aave and click on MetaMask under the ‘Wallet’ section. Connected you are able to see the list of existing lending and borrowing opportunities, credit balances and deposit assets to get interested or to apply for a loan. Every transaction will need an approval via your wallet so you will always have complete control of your money.
Loan and Borrow in Decentralized Finance Platforms
In understanding how to use DeFi apps, one of the most crucial functionalities is the lending and borrowing of stakes. Financial platforms like Aave and Compound enable decentralized lending/borrowing services to earn some interest on their holdings or avail loans by using their digital assets as security.
For instance, if you wish to use Aave to generate interest on your assets the preferred method is to place your ETH or any other supported delivery instrument with the platform. After that, you immediately begin to earn interest, and it compounds in actual time. Interest rates on Aave are set programmatically, that is, they depend on supply and demand within the Aave Protocol.
Its lending platform enables you to borrow loans in the form of assets held in your Aave wallet, if you wish to borrow. For illustration, if you have invested in ETH, you can leverage stablecoins like; USDC or DAI to a fixed percentage of your deposit’s worth. This is termed the loan to value or LTV ratio The size of the down payment influences how much of the property’s value is financed, as shown in the next section. Other offerings from Aave include features such as flash loans, which are a special non-collateralized kind of loan that must be paid off in the same transaction it was taken. Flash loans are mainly employed by developers and traders for arbitrage and other such maneuvers.
As of this writing in 2021, Aave has scaled to become one of the largest DeFi platforms with billions of dollars in TVL. This was a result of easy to use and secure platform as well as amazing product offerings such as liquidity pools and staking.
Trading and Swapping Tokens on DeFi Exchanges
Another vital area on the usage of DeFi apps is in trading and swapping tokens in decentralized trading platforms such as Uniswap, SushiSwap, or PancakeSwap. These platforms enable the users to buy and sell the cryptocurrencies directly using their wallets and without the use of middlemen or third parties.
For instance, on Uniswap you are able to exchange ETH for other tokens such as UNI, LINK or AAVE. Once you are connected to the Uniswap, choose the token you intend to exchange them with and make your requirement all in a go. The amount will be shown ad the current exchange rate, and you can finalize the transaction in your wallet. New tokens will then appear in your wallet after they have been swapped as soon as the swap is confirmed.
Uniswap follows the AMM concept, in which users make their tokens available in a pool to be made available to other users. These pools facilitate token swaps and in return are supplied by liquidity providers who in effect get paid through the trading fees within the pools. As of 2022, the total trading volume has exceeded $1 trillion demonstrating the role of Uniswap in the DeFi space.
Uniswap’s rival DEX call is SushiSwap which provides the same services as Uniswap but with a twist of staking. A liquidity provider gets to earn SUSHI tokens while using the platform, and the token can be staked to earn more. To accomplish it, SushiSwap also added such utilities like Onsen, which is a liquidity mining initiative, and Kashi, which is a system of lending and margin trading.
Yield Farming and Staking in DeFi
Yield farming and staking are well-known practices within DeFi and knowing how to navigate various DeFi apps for these purposes improves the yields. Yield farming can be described as offering funds to DeFi platforms, and in return, receive rewards in the form of tokens. Staking, on the other hand, means that tokens are deposited in a platform in order to contribute to the platform’s functioning and receive remuneration for that.
For instance, if you are a user of Yearn Finance – DeFi platform where yield farming is based on certain yield optimization strategies – you can invest in vaults to become a yield farmer. Yearn Finance invests your resources in multiple DeFi protocols to get the highest yield and you are paid in YFI or any other supported token.
Yearn Finance was established in 2020, and by 2021, its position as a yield farming platform was quite apparent it had users’ vaults earning impressive returns. I found that the procedures at the platform’s work were understandable to everyone even if they did not have extensive knowledge of DeFi: there were strategies for harvesting yield and reinvesting profits among others.
Another is the staking that you can do in SushiSwap or PancakeSwap. You get additional rewards when holding SUSHI or CAKE tokens that can be compounded or cashed out. For example, on PancakeSwap, there are ‘Syrup Pools’, which allows users to stake CAKE tokens and receive CAKE or other tokens in return. This has made PancakeSwap famous among users of the Binance Smart Chain, particularly when the platform outcompeted Uniswap in daily trading in the early part of 2021.
Risk Management For Defi Application
Another important segment of the knowledge involved in the utilization of DeFi apps chiefly consists of risk factors escalated by the use of these apps. DeFi is rich with opportunities, but there are popular pitfalls, and they include smart contract hacks, impermanent loss, and price swings. For instance, in 2020, hackers attacked multiple times the Decentralized Finance platform bZx exploiting the vulnerabilities, for seamless shell, smart contracts and made away with millions of dollars. Such mishaps brought out the need for proper research and diligence on the part of the user with regard to DeFi apps. To minimize such risks most users invest on audited platforms and often assess their investments.
Other risks include Impermanent loss which is a real problem for those who supply liquidity to DEXs such as Uniswap or SushiSwap. Impermanent loss refers to a situation where one’s tokens’ price on a pool varies significantly from the outside pool price. People should ensure that they do not loss their permanent tokens when engaging in a yield farming or liquidity providing.
List of Top 10 DeFi applications To Try in 2024
To provide you with more information about several effectively used DeFi apps, below is a list of the top 10 DeFi apps in 2024 with their features and strengths and weaknesses.
Uniswap (Ethereum-based DEX)
Pros: High liquidiity, easy to navigate, many tokens available.
Cons: That is, high cost of gas for transactions on the Ethereum network.
Aave (Lending and Borrowing Platform)
Pros: A good variety of assets, variable but fair interest rates, such a loan type as flash loans.
Cons: Security may be called for while interest rates may also be on the higher side.
Yearn Finance (Yield Optimization Platform)
Pros: Regarding its principal features, there are such potential benefits of the proposed implementation, automated yield farming, support of multiple vault strategies, high community appreciation.
Cons: Potentially dangerous moments in smart contracts, how smart contracts may be complex for obvious persons.
Compound (Lending Protocol)
Pros: Low interest rates, popular, compensation earned through governance tokens (COMP).
Cons: Less number of assets under it as compared to the close rivals.
SushiSwap (Decentralized Exchange)
Pros: Yield farming, staking rewards as well as the variety of liquidity pools.
Cons: Less liquidity than Uniswap, certain moments of insecurity.
PancakeSwap (Binance Smart Chain DFX)
Pros: Low transaction fees, we support numerous BEP-20 tokens, and high staking reward.
Cons: Due to BSC, centralization concerns slightly less protected than with Ethereum-based DEXs.
Curve Finance (Stablecoin Exchange)
Pros: The tradeoffs for stablecoin trades, low slippage, high liquidity, incentivized liquidity pools.
Cons: Only stablecoins are accepted, it might have a complicated user interface for beginners.
Balancer (Automated Market Maker)
Pros: Singly-canonicalized liquidity wells, multifaceted asset negotiation, multi-sign token pools.
Cons: Larger gas fees, possible impermanent loss.
MakerDAO (stablecoin and a lending protocol)
Pros: Launching of DAI stablecoin, decentralized organization, stability where other digital assets provide instability.
Cons: Low degree of over collateralization, dangers of sustaining the cyclic depeg.
Synthetix (Synthetic Asset Platform)
Pros: Synthetic assets created, engaged with traditional financial assets, community.
Cons: Complicated for newbies, potential for liquidity pool’s temporary loss of liquidity.
Many of these apps are pioneers of DeFi and present varied abilities that help clients with varying momentum and finicky approaches to the financial market. Engaging with these applications is a great way to have real-life exposure in the fast-growing DeFi space.
Insurance is still relatively new to the platform in 2022 with the likes of Nexus Mutual and Cover Protocol covering users investments against smart contract risks. These insurance protocols provide shields in a form of a financial instrument against probable losses to DeFi users.
See Also: How To Set Up A Crypto Wallet? Complete Guide [2024]
Conclusion
In the following sections, this article proposes a sustainable approach for novice investors to manoeuvre within the DeFi ecosystem. It requires a basic understanding to know how to operate the various decentralized finance applications if one plans to operate in the DeFi market place. Therefore, with the help of all the listed opportunities of DeFi, one can, for example, set up an appropriate crypto wallet; gain access to the DeFi platforms, such as Uniswap, Aave, and Yearn Finance; as well as manage risks.
The examples in real life like Uniswap, Aave, yield farming, staking point towards the fact that decentralised apps of the DeFi form can bring revolution in the realm of finance. To ensure that as an investor you gain big and avoid the pitfalls that many investors have fallen in with this new evolutionary market, you must be in tuned to the advancement of these new DeFi platforms and how to use them.
Thus, if you plan to lend, borrow, trade, or farm yields you will be in a position to make the right decisions efficiently and safely as you learn how to work with Defi apps.
