DeFi has been all the rave lately! The invention of decentralized finance has turned the crypto world upside down and changed the way finance is being handled. What was more phenomenal - the creation of DeFi wallets. But… what exactly is a DeFi wallet? Is it any different from other crypto wallets? Here’s everything you need to know.
What Is DeFi?
Before we dive deep into the subject of DeFi wallets, let's refresh our knowledge about decentralized finance, DeFi for short. So, what is DeFi? Here’s the basic DeFi guide:
DeFi is a financial ecosystem that has eliminated the need for any third-party governance - banks, for example. It consists of many different financial applications built on blockchain networks, most notably the Ethereum blockchain. DeFi creates an open-source and transparent system that is available to everyone.
It has been the biggest invention in the crypto world. With DeFi, all the transactions are held in a distributed ledger inside of the blockchain, which ensures that there is no single entity in control of the information. DeFi has enabled peer-to-peer transactions that are executed through smart contracts - pieces of code set up in the blockchain, meaning that users are directly connected without any interference from an intermediary.
While with centralized finance, your money is kept by banks or other financial corporations and those corporations facilitate every financial movement, DeFi allows you to have power over your money. You can lend, trade, and sell from any place with an internet connection.
However, DeFi is still in its infancy stage, meaning that there are some issues occasionally occurring, for example, regulation control. Nonetheless, these issues are on the way to being resolved. And, there is a big future waiting for DeFi.
What Is DeFi Yield Farming?
One of the key elements of DeFi is yield farming. Here’s what you need to know about DeFi yield farming.
What Is Yield Farming?
In simple terms, yield farming is a way to make more crypto from your crypto. It's the process of putting your assets to work to earn interest.
How Does Yield Farming Work?
Yield farming is similar to a savings account. Yield farming is a way for exchange platforms to motivate people to participate in liquidity or staking pools by lending their assets to an exchange platform. Incentives for taking part in liquidity or staking pools include transaction fee percentages, interest, or special native tokens.
Two ways a person can earn rewards in DeFi are staking and lending.
DeFi Staking
Staking pools or stake farming is the process where people stake (lock) their crypto assets for a specific time period. During that time, the person won't be able to use their assets. However, after the time runs out, the person will receive DeFi staking rewards.
Those rewards will vary from one exchange platform to the other, so you have to make sure to check what is the DeFi platform's ROI rate. ROI, or return on investment, is a metric that exchange platforms use to measure how much profit will a person make on their investment.
DeFi Lending
DeFi lending, otherwise known as liquidity pools, refers to the process when people deposit their assets to a liquidity pool to provide liquidity for a token. People who invest - liquidity providers - earn interest by lending their tokens for other users to utilize. DeFi loans cost fees and these fees are later distributed to liquidity providers as interest.
Best DeFi Yield Farming Protocols
There are a lot of DeFi yield protocols out there so it is hard not to get lost in the sea of platforms that offer different DeFi yield farming rates. Here are the five most popular yield farming platforms:
1. PancakeSwap
PancakeSwap is a decentralized exchange platform that is based on the Binance Smart Chain. Apart from the interest, you collect from the liquidity pools, you can also earn rewards in CAKE tokens.
2. UniSwap
UniSwap is one of the largest Defi platforms that offer several liquidity pools. It is based on the Ethereum chain.
3. Curve Finance
Curve Finance is an Ethereum-based decentralized exchange platform designed specifically to provide trading between tokens that have the same value.
4. Aave
Aave is a lending protocol where users can make deposits in stablecoins and collect interest rates of up to 13%.
5. SushiSwap
SushiSwap is a decentralized exchange platform that lets users trade crypto coins.
What Is a DeFi Wallet?
So, you might be wondering, if there are no banks in DeFi, how to accept crypto payments? The answer is - DeFi wallets. DeFi wallets are what caused the major success for DeFi.
DeFi wallet is like your own bank - it allows you to store your funds without any reliance on a third party. Here, the only person in charge of your funds is you - you choose where and when your funds go. It's a revolutionary concept - before the invention of DeFi wallets, banks were in control of your money.
Unlike other crypto wallets, the DeFi wallet doesn't require any identity verification or delicate personal information. This means your identity is never at stake. And, although it seems that anonymity makes DeFi wallets unsafe, they're actually considered to be one of the safest options on the market. The only problem you might encounter is that since you are the only one in charge of your wallet if you lose your login key, there is no way to recover it.
Most DeFi wallets work on the Ethereum blockchain, meaning they support all Ethereum-native tokens and most other DeFi tokens since they are usually built on the Ethereum blockchain.
What Are The Traits of a DeFi Wallet?
There are several traits that make DeFi wallets stand out from other crypto wallets. The most crucial traits of DeFi wallets are:
Non-custodial
With DeFi wallets, users can send, transfer and receive funds and be sure that they are the only ones with access to those funds.
Key-based
All DeFi wallets have unique access keys - typically a 12-word seed phrase, and the owner is responsible for keeping the private key safe. Unlike centralized crypto wallets, where the platform may help you recover your keys, if you forget or lose your DeFi wallet key, there's no way to restore it.
Compatible
All decentralized wallets are accessible through a connection with a web3 wallet - wallets that enable access to the 3rd generation of the web and are essential for safe interaction with DeFi products. This means that DeFi wallets are mobile and can connect with a DeFi application without leaving the app.
Accessible
All non-custodial wallets can manage a wide variety of crypto assets - Ethereum-based DeFi wallets allow users to deposit not only ETH but also stablecoins and DeFi tokens.
What to Consider When Choosing a DeFi Wallet?
With so many DeFi wallets out there it is important to know what things you should consider before selecting a wallet. Here are the main points you should look at in a wallet:
Supported tokens
The first thing you should look for when choosing a wallet is what assets are supported by the platform. Not all DeFi wallets support the same tokens, so you should always check whether your chosen wallet is compatible with the currency you want to store in it. For example, most DeFi wallets don't support Bitcoin, so if you want to trade in Bitcoin, you should look for a specific wallet.
Product you're going to use
Your DeFi wallet is essentially a way to access the DeFi ecosystem, so it's important that the wallet you choose is supported by the product you want to use. For example, some wallet platforms provide accessibility to staking or yield farming but others don't.
Social presence
Another important thing to look for is social presence. Any prominent DeFi wallet platform will have an active social media presence and engagement with its community. So, if you feel skeptical about a wallet, check out their social media.
Reputation for security
Another thing to consider is the wallet's reputation, especially in security matters. You should check whether the provider takes the necessary steps to ensure safety and whether there were any issues with security in the past. You wouldn't want to have your assets at risk, would you?
Simplicity of use
Last but not least thing to consider - the question of simplicity. It is especially important if you are new to the whole DeFi thing. You should check whether the wallet has a simple process when it comes to setting up an account or making a trade. You wouldn't want to spend a lot of time and energy on the headache that is the complicated crypto procedures.
What Are The Best DeFi Wallets?
With a wide variety of DeFi wallets all with different features, it can be hard to find an ideal pick. Especially, if you don't have a clear outlook of what to look for, and what are the best choices. Here are the most currently popular DeFi wallets that are available:
1. MetaMask
If you have been looking up into DeFi wallets, you probably have already heard of MetaMask. It is one of the most widely supported wallets out there. MetaMask is a web browser extension, meaning it can be easily connected to a DeFi platform without leaving the page. MetaMask is operating on the Ethereum blockchain and it supports all Ethereum-based currencies as well as Binance Smart Chain tokens.
MetaMask is one of the most popular crypto wallets out there and what played a crucial part in its popularity - smooth and easy integration with most DeFi apps and protocols. Besides, almost all how-to guides on the biggest DeFi platforms use MetaMask as an example for explaining tasks. So, you could say it's a good choice for beginners wanting to start in the DeFi ecosystem.
2. Argent
Argent is a mobile-first wallet that is completely newbie-friendly. Argent is an app that is very similar to Venmo - it is very simple to use yet very effective.
One of the most unique features Argent has to offer - the ability to recover the wallet without a key phrase and centralized administration. Argent allows you to add trusted people or devices to recover your wallet. They will have limited smart-contract predefined permissions, and you will be able to remove them from your wallet at any time.
3. Coinbase
Coinbase - the biggest centralized exchange, has released a DeFi wallet. The Coinbase Wallet is one of the friendliest wallets for those unfamiliar with DeFi - it provides an easy way to transfer funds, and interact with DeFi applications. You just need to enter the username of a person you're sending the funds to instead of having to type a long wallet code.
Although the Coinbase Wallet is non-custodial, your private access keys can be stored on your device to make an easy recovery if needed. And, it also includes the proven assurance of security - biometric security and a six-digit PIN.
What's also unique about the Coinbase Wallet - it is one of the only few decentralized wallets that support Bitcoin, as well as a wide range of other tokens.
Concluding Thoughts
As you have probably already seen, the world of DeFi wallets is wide and diverse. And, it is still rapidly growing every day. With such a wide variety of alternatives available, making a choice can be tough. However, a clear outlook of what you want from a wallet makes the choice a little easier. Besides, it only benefits the users that there are more and more DeFi wallets coming out every day - with such a variety everyone will find their perfect fit. And, with the industry constantly developing, we can only expect that DeFi wallets will continue to improve.