Decentralized Finance or DeFi is fast becoming a household name. Chances are that if you have heard of Crypto, you would have heard the term DeFi.
However, to many, the concept of DeFi and the infrastructure it entails is quite alien.
In fact, most Crypto retail is limited to the Centralized Finance or “CeFi” experience of trading in cryptocurrencies through centralized exchanges (“CEXs”).
This is the first part of a series of posts to introduce you to trading through DEXs & is inspired by those of you who continue to have concerns in dealing with CEXs due to their KYC requirements and the fact that many establishments are going bust in this market downturn.
We will then explore DAOs & Web 3.0 to further our understanding of new age opportunities.
Put on your learning hats, folks, for here we go!
1. What is a Cryptocurrency Wallet?
A cryptocurrency or DeFi wallet functions like a checking account at a Bank. Just like your bank account, you can use it to receive, send and store Crypto.
The basic distinction when choosing a wallet is whether they are cold or hot. Regardless of the type, all wallets seek to preserve identity & privacy.
We will look at these issues in detail below.
1.1. Hardware Wallets
Cold wallets or hardware wallets store Crypto on the device instead of on-chain.
Since they are not connected to the chain at all times, it is maintained that they are almost impossible to hack. However, to receive or send Crypto, these hardware wallets need to be connected to the chain.
To understand cold wallets further, refer to this Ledger Nano S Plus review.
1.2 Software Wallets
Hot wallets, or software wallets, store Crypto on-chain but otherwise function just like cold wallets.
While this makes them vulnerable to a hacking attack, it is important to understand that the blockchain has various safeguards to prevent such an occurrence.
I would concede that the data does not support this point of view, with two of the largest hacks in the history of Crypto taking place in the past 2 years.
However, the rate of occurrence of these hacks is not too high, whereas the overall market cap of the industry has been on a consistent rise.
Hence when a hacker does get through, he scores big. Also, important to understand that in most cases, the funds get returned as the industry acts together to block the hacker from moving the stolen Crypto.
Learn MetaMask basics here.
2. Setting Up A Wallet
Regardless of the choice of wallet that you choose to go with, the underlying idea is that you don’t need to furnish any personal information to get started. For both types, you will be prompted to write down & store your seed phrase safely.
This is a list of 12 to 24 words chosen randomly by an algorithm that needs to be inputted the first time you set up a wallet and to retrieve a wallet later on when changing your mobile device or hardware wallet.
Without the seed phrase, which acts as the digital key, you will not be able to recover a lost wallet.
No private information is asked for at set up or any time in the future. There is no need for an email, password, identity document, or the like. You may call a DeFi wallet a no KYC wallet or anonymous friendly.
3. The Concept of Gas Instead of Fee
When you transact on a CEX or make a withdrawal, you pay the trading fee and withdrawal fee, respectively. This is essentially gas for the transaction to be completed on-chain.
The same concept applies to your DeFi wallets, and it is necessary that you have certain coinage of the transacting network for the transaction to go through. For example, for sending $USDT you need some $TRX & for $NAKA you would need $MATIC or $ETH.
The basic difference here from your TradFi experience in dealing with your local bank or your CEX is the concept of deduction through the source. CEXs deduct a portion of the transacted amount as a fee using the same trading pair.
For a DeFi wallet, you need funds separately in the denomination of the network being used.
4. The Desktop V Mobile Experience
4.1. Browser Extension Wallets
The earliest software wallets were browser extensions that you could download and install. This is an extremely flexible method of connecting with websites of decentralized applications.
It was here that the concept of Web 3.0 was born. You could simply go to the website of a DEX, for example, connect your wallet through the extension downloaded into your browser, and viola, your funds would show up.
These browser extensions are available today and remain the dominant form of software wallets, especially in the industrialized West, where ownership of personal computers is high.
4.2. Mobile App Wallets
In many parts of the world, ownership of personal computers lags behind ownership of smartphones. The Crypto industry has been quick to catch on to this disparity by launching mobile applications for their different product suites.
Wallets are no different, and we now see that the protocols offering a web-only experience have also shifted to mobile applications. To round off the true Web experience, these mobile wallets come built-in with:
- DApp browsers – basically a mobile version of the browser extensions model;
- Host quick links for DApps to take you automatically to the desired destination in a connected manner.
5. What Can You Do With A DeFi Wallet?
The short answer is that you can probably do more with your DeFi wallet than with your exchange account at Binance or FTX. The long answer is the list below:
- Send, Recieve & Store Crypto
- Buy Crypto Through Credit / Debit Card from inside the application
- Send, Recieve, and Store NFTs
- Connect to DApps to swap, trade, stake, or undertake yield farming
- Connect to DApps to mint & trade NFTs
- Connect to DApps to play blockchain games.
Cryptocurrency wallets are a powerful innovation.
They are the foundation on which the decentralized web is built, including DeFi & NFTs.
They will form the cornerstone of Web3.0.
While you may be comfortable with your CeFi experience with CEXs, it is the decentralized world where most of the early action takes place & where new age opportunities present themselves.