Whether you’re wholly new to the world of crypto or you’re a decently experienced investor, there’s a lot to learn when it comes to the hot new digital asset everyone is talking about — DeFi.
This guide will take you from the background of DeFi to how you can get involved with it to the one tool that can help you keep track of it right alongside the rest of your portfolio.
Glasses on — it’s time for some learnin’.
Take it From the Top: What Is DeFi?
DeFi stands for “decentralized finance” and it’s a subset within the larger cryptocurrency space.
DeFi is used to describe a class of financial products — such as apps and “protocols” which are basically autonomous computer programs — that are built on blockchain and governed by smart contracts.
Smart contracts are self-executing, digital, code-based contracts that contain the terms of an agreement. Their functionality enables trackable but irreversible transactions to take place between anonymous parties.
DeFi applications aim to disrupt the financial industry as we know it by making it decentralized and non-custodial.
Decentralization happens when the developers who create a protocol or app hand over ownership of the smart contracts to their users, turning them into community-controlled assets.
The non-custodial element of DeFi means that the individual maintains control over their DeFi coins and/or tokens, which is in stark contrast to the way traditional banks and even cryptocurrency loan programs take control of your assets whenever you need to use them to complete a transaction.
Why Was DeFi Developed?
Much the way cryptocurrency was created as an alternative to fiat money, DeFi was created to provide alternatives to common financial services.
For example, DeFi decentralizes lending so that people who don’t have access to or have been disenfranchised by traditional banks still have a trustworthy outlet from which they can get a loan.
While there are of course risks associated with such a new and groundbreaking concept, DeFi shows a lot of promise as the basis for a financial future that’s more efficient, flexible, transparent, and most importantly equitable.
How Does DeFi Work?
Right now, most DeFi protocols and apps are built on Ethereum.
Ethereum is an expansion of the technology and concept behind Bitcoin. Instead of just a currency, Ethereum is a global, decentralized technology network — which means it’s not owned or controlled by a central entity — that powers protocols and applications that use smart contracts. Ether is Ethereum’s native cryptocurrency, and just like Bitcoin it can be purchase on a crypto exchange or mined (for now).
It’s important to keep in mind that, right now, DeFi is largely unregulated and not insured by the FDIC the way traditional banks are, so investors are advised to do their research and may only want to contribute assets they can afford to lose.
What Are DeFi Coins and Tokens?
In the crypto world, DeFi coins and tokens are often referred to interchangeably. And while they are quite similar, there are a few key differences that do matter.
A DeFi coin is much like a digital version of a fiat coin — it transfers value in the course of a financial transaction. DeFi coins are built on and often named for their unique, native blockchain networks. In spring 2021, Maker, Compound, Uniswap, Aave, Chainlink, and Ankr are among the most popular DeFi coins.
DeFi tokens also transfer value, but not necessarily always in a financial sense. Utility tokens can be used like passwords to provide access to a resource, asset tokens can be used to represent physical assets such as real estate, and of course there are non-fungible tokens (NFTs) that represent one-of-a-kind “items” such as digital art (For example, Nyan Cat recently sold for $600,000). DeFi tokens are also different from coins because they can be built on existing blockchain networks.
3 Steps to Start Investing in DeFi
Here’s how you can get started with one of the most common uses for DeFi — lending and borrowing assets.
Step 1: Set Up Your Crypto Wallet
First up is choosing a crypto wallet.
Your wallet is how you’ll store, send, and receive DeFi coins. Wallets come in all formats and some are also integrated with exchanges where you can purchase DeFi coins.
MetaMask is a popular wallet, exchange, and browser extension. It supports Ethereum and can connect users to different DeFi protocols, which makes it widely used among DeFi investors.
Step 2: Purchase Your DeFi coins
Next you’ll need to invest in the coins that align with the DeFi protocol in which you want to participate.
Right now, most protocols exist on Ethereum, which means you’ll likely be purchasing Ether coins or ERC-20 tokens.
Step 3: Participate in Your Protocol of Choice
Lending and borrowing are just as integral to DeFi as they are to our traditional financial system. But one of the benefits of DeFi is that it enables its users to both borrow and lend assets without losing custody of their coins.
There are several protocols that support lending and borrowing, but we’ll use Compound for this example.
You’ll visit Compound’s website, connect your wallet so it has access to your DeFi coins, and then you’ll interact with the protocol to either lend out or borrow tokens. When you lend in Compound, you’ll earn interest. If you borrow, you’ll have to put up 100% of the amount in another supported asset as collateral.
How to Track Your DeFi Coins and Tokens with the Rest of Your Investment Portfolio
From day one, the team at Kubera has been committed to helping our customers track all of their assets in one place.
And that’s why, today, Kubera is the only portfolio tracker in the world where investors can monitor and manage traditional, crypto, and DeFi assets from a single dashboard!
It’s easy to track your DeFi coins, tokens, and all your other precious assets side by side — just visit kubera.com, sign up, create a simple profile, and start adding your assets.
You can add almost any bank, brokerage, crypto, and DeFi account to Kubera (here’s a rundown of most of the institutions with which we work).
With just a few clicks, you’ll be able to see the real-time value of both your traditional and modern investment accounts on a single page.
Now it’s time to add all the assets that make up the rest of your portfolio.
First, start tracking the value of individual stocks and crypto coins using Kubera’s tickers.
Then, take advantage of our partnership with leading asset experts like EstiBot, Zillow, and more to see the real-time worth of your real estate investments, vehicles, and even domain names.
And for those final few, harder-to-track assets like physical collectibles — there are always Kubera’s spreadsheet-like fields where you can enter asset information and value in order to track them right alongside everything else in your diverse portfolio.
With all your assets and accounts added to Kubera, you can enjoy a recap view of your portfolio that gives you deeper insight into your portfolio’s performance as well as the health of your net worth.
For an animated walkthrough of the above, check out our How Kubera Works page.
As a well-diversified investor — DeFi coins, tokens, and other assets may become part of your portfolio sooner than you think.
To make sure you’re taking advantage of these cutting-edge assets instead of the other way around, use the only complete portfolio tracker in the world — Kubera.
Sign up for an affordable subscription today. Or, introduce your financial professional to Kubera’s white-label solution to see how our platform can upgrade your financial management plan.