Want to generate returns from your crypto while HODLing? Or do you just want to get a better interest rate than what the banks are giving you? Look no further! Get into DeFi!
DeFi stands for Decentralized Finance. It’s a movement in cryptocurrency that looks to create an alternative financial system that helps the average joe rather than being skewed towards the fat cats and the big banking executives. DeFi offers very competitive interest rates that are ideal if you want to generate returns from your crypto holdings, or if you want to get a better interest rate return than what the banks are giving you.
This is a 4-step tutorial will help you get there. Before we start, there are 4 elements to understand before jumping onto DeFI:
- Fiat-to-crypto exchange. These are website platforms where you will use your credit/debit or bank account to purchase cryptocurrencies.
- Crypto-wallet. This is software that you install on your computer or phone to be able to access and interact with the cryptocurrency you have purchased.
- Crypto-to-crypto exchange. These are website platforms where you can use your cryptocurrency from your crypto-wallet to purchase other cryptocurrencies. You cannot buy cryptocurrency using a credit/debit card or bank account from this website.
- Crypto banks. These are website platforms where you can deposit your cryptocurrency to earn interest. You can also take out fiat or cryptocurrency loans from these platforms where you will pay interest.
The 4-step guide is summarized below:
- Buy cryptocurrency from a fiat-to-crypto exchange.
- Create a software wallet to store your cryptocurrency.
- Transfer your cryptocurrency from the exchange into your wallet.
- Transfer your cryptocurrency from your wallet to a crypto-bank to earn interest.
1. Buy crypto from fiat-to-crypto exchanges
You’ll need to purchase cryptocurrency using your fiat currency (i.e., AUD, USD, EUR, MYR, SGD, GBP) using fiat-to-crypto exchanges. Generally, most exchanges today are secure and are insured, thus I would select an exchange based on its user-friendliness, transaction fees charged, and breadth of cryptocurrencies available for purchase.
Start your DeFi experience by buying Bitcoin and Ether. Fiat-to-crypto exchanges are usually limited in the number of cryptos on offer due to regulatory requirements; however, crypto-to-crypto exchanges allow you to access hundreds of cryptocurrencies as they are not regulated as heavily. Thus, to own other cryptocurrencies such as DAI, transfer your Bitcoin or Ether to a crypto-to-crypto exchange to make your purchase.
My recommendation: I use Coinbase as my fiat-to-crypto exchange. It is a reasonably cost effective solution for a simple, secure, intuitive, regulated, and insured platform. Coinbase does a lot of research and vetting before it allows cryptos to be purchased on its exchange, thus you can be assured that the cryptos on sale on this fiat-to-crypto exchange have strong business propositions and are not scams. It also gives you access to Coinbase Pro as a crypto-to-crypto exchange.
|Crypto coins available||20 cryptos including Bitcoin, Ether, and DAI||17 cryptos including Bitcoin and Ether||8 cryptos inc. Bitcoin and Ether||80 cryptos|
|Fees (Bank Account)||1.49%||3.5%||5.99%||0.6%|
|Fees (Credit/Debit Card)||5.48%||> 6%||10.9%||–|
(Get USD$10 of Bitcoin)
Table 1. Recommend fiat-to-crypto exchanges
In the example below, I use Coinbase to purchase USD$10 worth of Ethereum (ETH) at a price of USD$180.88 per ETH using a linked bank account. This gives me 0.049ETH due to Coinbase’s fee of USD$0.99.
2. Create a crypto-wallet
Software wallets are a quick and easy way to store your cryptocurrency. They can be created in a matter of minutes, where you just click on “Create New Wallet”, and you are asked to remember a 12-word recovery phrase and your cryptocurrency wallet is created.
Once your cryptocurrency wallet is created, you can receive cryptocurrencies by transferring them from your crypto exchange account (i.e., Coinbase, Binance) to your wallet address. Your wallet address will usually be a set of 32 to 40 alphanumeric characters as follows “0xb9b69e8…11B124325”. You can cut and paste your wallet address (or using WalletLink or WalletConnect to scan the barcode of your wallet address) from your wallet app to your exchange account.
As long as you create a software wallet on your own computer on your private WiFi network, your software wallet should be secure. Most people lose their cryptocurrency as they have forgotten or lost their recovery phrase. Thus make sure you write your recovery phrase on a piece of paper and store it in a safe location, or store it in a password manager like LastPass or Dashlane.
Software wallets are either multi-coin or single-coin. Multi-coin wallets are able to store cryptocurrencies from different blockchains such as Bitcoin, Ether, Tomo, XRP, and more.
MyEtherWallet and Metamask are Ethereum wallets, thus they can store any coins that are based on the Ethereum network. Single coin wallets can be useful if you are mainly looking to participate in that specific blockchain network alone; however, I recommend multi-coin wallets.
My recommendation: I use Coinbase Wallet, MetaMask, and TrustWallet. Coinbase is a stable, simple multi-coin (Bitcoin, Ethereum) app which gives you direct access to DApps, and MetaMask is a browser extension that lets you easily connect to crypto-exchanges and other Dapps from your PC/Laptop browser. For more advanced users, I recommend TrustWallet as it has many features that are not available in Coinbase Wallet and Metamask. Some of the attractive features are
- Automatic detection and display of cryptocurrencies that have been previously traded on your wallet and lists all of them. This includes Bitcoin, Ether, DAI, and even Orbyt tokens.
- Ability to seamless stake crypto such as Cosmos, Tron, Tezos, etc. to generate Stake Rewards.
- Use of WalletConnect to connect to Dapps is more stable and efficient compared to Coinbase’s WalletLink.
|Multi-currency||Yes (Bitcoin, Ether, ERC-20 tokens)||Yes (Many cryptos, and you can add your own)||Ether and ERC-20 tokens (Not Bitcoin)||Ether and ERC-20 tokens (Not Bitcoin)|
Table 2. Recommended software crypto-wallets
In the examples below, I show how you can copy your wallet address from MetaMask and Trust Wallet for ETH.
3. Transfer your funds from your fiat-to-crypto exchange account to your crypto-wallet
From your crypto-wallet, extract the wallet address of the cryptocurrency you want to perform the transfer in. In our example below we are transferring Ethereum from Coinbase into TrustWallet.
IMPORTANT: You will lose your cryptocurrency if you send from one cryptocurrency (i.e., Bitcoin) into another cryptocurrency’s wallet (i.e., Ethereum). You must make sure that you are sending Bitcoin into a Bitcoin wallet address, Ethereum into an Ethereum Wallet address, XRP into an XRP Wallet address, and so on. If you send cryptocurrency into a different cryptocurrency’s wallet address, it is lost forever!
In the example below from Coinbase, we have cut and paste our wallet address in to the “Recipient” and selected to send over USD10 worth of ETH, which is about 0.0557 ETH.
In the confirmation window, it shows “Network fee”. This is the amount of ETH that you need to pay in order for your transaction to go through. It shows that it is USD$0.05 cents. The charge for your network fee is dependent on how much traffic there is on the network, and not on the amount that you are transferring. You could be sending over a million dollars worth of ETH (5555 ETH) and the charge could still be USD$0.05 as long as the network is not overloaded. Compare this to a bank which would charge you a percentage of the amount being transferred. This is one of the advantages of the DeFI system. Always make sure you have a small amount of cryptocurrencies to pay for network fees for any crypto transfers.
4. Transfer your funds from your crypto-wallet to crypto banks.
Crypto-banks connect you, as the depositor who wants to generate interest from your capital, to borrowers who pay you interest to use your capital to make purchases or investments. Most borrowers on DeFI are borrowing crypto to perform margin trading; however, there are some who are using those loans to make fiat currency purchases or investments. Some individuals prefer to use crypto loans rather than selling their crypto to minimize capital gains, or they may have bullish views on their crypto holdings and prefer not to sell it.
Most crypto-banks differ in terms of the interest generated, range of cryptocurrencies they have available to generate interest, frequency that the interest is being paid out, and the user-friendliness of the platform. The platforms I have suggested are pretty stable and secure, and the funds are insured but there is always a risk of a security breach with crypto.
My recommendation: I use Compound and Celsius. Compound is super user-friendly and its Dapp is easily accessible from Coinbase Wallet. You can see your money grow which is very nice. You can take out your money whenever you want and therefore it is a highly liquid platform. The only downside of Celsius is that the interest rates are pretty low. Compound requires a little more work in terms of having to send your cryptocurrency to Compound’s wallet that they’ve generated for you. However it gives you access to the widest range of cryptocurrencies with reasonably high interest rates, and even higher if you decide to accept interest in CEL tokens. I like having all my cryptocurrencies generating interest in one spot, thats why I like Celsius. I have decided to accept CEL tokens as interest as I believe that the value of CEL has a good chance of being more valuable over time. Celsius pays out interest weekly, thus you can always take your funds out, but you probably want to wait until the interest is received. In that sense it is not as liquid as Compound, but you are being compensated for less liquidity by the interest rate. If you above 5%-15% of your cryptocurrency holdings in your Celsius account are CEL tokens, you will receive higher interest. This is part of Celsius trying to encourage the uptake of the CEL token.
|Cryptocurrencies||X17 cryptos||X6 cryptos||X5 stable coins||X7 Ethereum-based cryptos|
|Ease of Use||Easy||Poor||Poor||Very Easy|
|Referral link (Earn USD$10 of BTC)||https://celsiusnetwork.app.link/120216636e|
Table 3. List of cryptobanks.
In my example below, I show you how to access Compound from Coinbase’s Wallet app,
In the example below, I show how to transfer Ethereum into Celsius.
An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading