Decentralized Finance 101 Guide

# Decentralized Finance 101 Guide ## Introduction This guide will serve as a 101 entry level track for people interested in exploring decentralized finance (DeFi). This is not exactly a course in the usual sense where you have required homeworks, readings, and grades, but a self-paced list "quests" to complete to learn more about DeFi. These quests are mostly designed in the spirit of _learning by doing_ and by the end, you should have a baseline understanding of a specific concept or topic that you can use or learn more about. Quests generally follow a simple path from top to bottom. Start with the "On-Boarding" Quest, which is required to begin using Ethereum and engaging in the Decentralized Finance community. Each quest also has suggested readings which will give a more in-depth look at the topics in the quest. Note, this guide is unapoligetically: - Primarily focused on Ethereum. - Not a guide for speculation or day trading. - Will not show you a get rich quick scheme. By the end, you will understand the tools in DeFi will make you better at valuing products, by understanding underlying mechanics of tools and the emergence of a market for said tool. There are lots of what the community calls, "moonboys" who hope to speculate and gain on token prices, but it is usually indistinguishable from ponzi schemes or scammers who simply wish to find suckers to buy a token at a much higher price. If you focus on underlying mechanics the real value, and especially misvaluation, will be apparent. ## Requirements You should have about $200 to $150 available to purchase Ethereum via credit or debit card to have starter capital. As you get to more advanced Quests, you may need more capital. If you don't have enough now, feel free to try out the Quests with lower denominations. If you don't have enough capital at any point, feel free to remove your positions in previous quests. ## Quests ### On-Boarding > Welcome to DeFi! This quest will get you started with a mobile wallet and baseline level of security to protect your funds. ##### Download a Wallet and Get Crypto 1. Download [Argent](https://www.argent.xyz/) on your phone, and set it up with a unique passcode, along with your unique ENS addresss. [Contact me](https://twitter.com/digital_monad) to receive a "Golden Ticket" which will make the signup process faster. 2. Inside of Argent, click "Add Funds" and use MoonPay to purchase $150 worth of Ether (ETH), and $50 worth of Dai. 3. If you are done, you should see your available funds inside the Argent wallet. If this is your first cryptocurrency purchase, welcome to DeFi! 4. Secure your wallet. Set up a Guardian in Argent to protect your funds if you lose your phone. Click "Profile" then "Security" to see the Guardians. Start with Argent Guard, which sets up the Argent team's service to protect your funds. ##### On Board Others 1. Argent should have given you "golden tickets" which make the signup process faster. Look in the app for the Golden Tickets. Sign up a few friends. 2. Add your trusted friends as a Guardian. Ideally, you want 4-5 Guardians just in case your Guardians also lose access to their accounts. Click, "Profile" then go to "Security" and then "Guardians" to see your current list and add more. ##### Knowledge is power Subscribe to [/r/ethereum](https://www.reddit.com/r/ethereum/) to stay up to date on the latest news in the Ethereum space. ##### Suggested Readings - [Shelling Out](https://nakamotoinstitute.org/shelling-out/) - [Hidden Secrets of Money](https://www.youtube.com/watch?v=DyV0OfU3-FU&) - [Ether: The Triple Point Asset](http://podcast.banklesshq.com/4-ether-the-triple-point-asset) ### Beginner Beginners quests will generally use the Argent Wallet, and will try to keep risk low. For most people, this is a perfect substitute to their standard bank accounts, and they should see better ROI than a typical savings account. ##### Decentralized Lending (Risk: VERY LOW) > Programatic lending is the base tool in DeFi. Simply, someone lends tokens to a protocol. Someone else must submit collateral well over what they want to borrow, and they may withdraw your tokens. At the very least, most protocols are well collateralized in value, but also tokens, so there is very low risk of losing all of your money. 1. In the Argent wallet, click "Invest" and select Aave. 2. Select "Aave ETH". Lend $20 worth of ETH into the Aave protocol. 3. You're done. You should see your expected APY. Compare this with your bank's APY. Is it more or less? ##### Liquidity Mining 1 (Risk: LOW) > Imagine you have 1 share of Apple stock worth $100, and $200 in cash. Let's say you find two people. One who wants to sell their Apple stock, and one who wants to buy Apple stock. You can do a roundtrip to first, buy the stock from the seller at $98. You now have 2 shares of Apple now and $102. Next, you can sell the Apple stock to the buyer at $100. You now are back to 1 share, but you have $202, more money than you started with. This arrangement where you connect two people who want to buy and share stocks is called "Market Making" in standard finance, and is done by exchanges that have billions in volume per day. The difference between the $98 you bought for and $100 you sold for is a $2 spread, and each time a round trip is made, you will profit this spread. In DeFi, the market making is automated, and you simply need to provide the "stock" and "cash". This is slightly more risky because you can lose overall value if your "stock" and "cash" drops in price, but because of the market making, your losses will be less over time than holding the pair by themselves. 1. In the Argent wallet, click "Invest" and select Uniswap V2 Liquidity. 2. Select Dai-ETH pool, and invest $20 worth of ETH and $20 worth of Dai in the pool. 3. You're done. You now have a position in the liquidity pool. Each trade will earn you a small percentage of returns over time. ##### No-Loss Lottery (Risk: LOW) > When you put funds into lending acounts, you earned interest on each dollar you put in. What if instead of earning interest directly, you pooled money with other people, and the _interest_ gained at the end of the week was randomly given to a pool member? The losers only lost interest, but receive their money back. This is a No-Loss Lottery! 1. In the Argent wallet, click "Invest" and select PoolTogether. Purchase 5 Dai worth of tickets. Good luck. 2. You're done. At the end of the draw in about a week, don't forget to withdraw your Dai. ##### Real Bitcoin, on Ethereum (Risk: LOW) > By using certain cryptographic protocols, it's possible to build a bridge to cryptocurrencies on blockchains that are not on Ethereum. The Bridge will lock the tokens on the respective blockchain, and generate a token on Ethereum. These tokens can live on Ethereum and be traded, lended, and used, and can at any point be converted to an account back on respective blockchain. 1. In the Argent wallet, select "Profile", and go to "Security" and "Authorized Dapps". 2. On a browser, go to [1inch.exchange](https://1inch.exchange/). In the top right, click "Connect Wallet" and choose "WalletConnect". You should see a QR code. 3. Back in the Argent wallet, click "Connect". This should open a camera and you can take a photo of the QR code in the browser. You now have connected 1inch to your Argent App. 4. In the browser with your connection, select Dai as the "From" token, and renBTC as the "To" token. Purchase renBTC by adjusting the ETH quantity until the value shows $20. 5. First click "Unlock" and this will generate the appropriate permissions for 1inch to receive your ETH. 6. When this transaction is completed, click "Swap Now". You should then see a transaction to approve a swap for ETH to renBTC. 7. You're done. You now have a token that is a locked version of Bitcoin, on the Ethereum Blockchain. If the price of Bitcoin goes up, the price of your token will also go up! ##### Suggested Readings - [An interview with the creator of Compound](http://podcast.banklesshq.com/11-how-to-go-bankless-with-compound-robert-leshner) - [Evolution of Monetary Policy](http://podcast.banklesshq.com/2-the-evolution-of-monetary-policy) - [An interview with the creator of Dai/MakerDAO](https://unchainedpodcast.com/rune-christensen-of-makerdao-part-1-how-to-keep-a-crypto-collateralized-stablecoin-afloat/) ### Intermediate Intermediate Quests unlock the full potential of DeFi, but expose you to a healthy amount of risk. Penalties can be quite large if you do not act appropriately when conditions are met. It is quite possible to stay on Argent and never expose yourself to this much risk, and happily interact with the DeFi world. People that want to learn more who also have capital to engage at higher risk profiles, are encouraged to try these strategies out. ##### Ditch Venmo and Paypal (Risk: LOW) > Are you also paying 3% in fees for every transaction between you and your friends? The Ethereum cryptographers have combined a new technology onto Ethereum resulting in a payment superhighway scheme that has the throughput of modern payment processing systems. The scheme uses a "rollup" concept, to batch thousands of transactions in a second. Once you add funds to your account on this superhighway, transactions between parties become a matter of clicking a button, and are 100x cheaper than full transactions on Ethereum. Are you ready to go fast? 1. Go to [zkSync](https://wallet.zksync.io/). Click "WalletConnect" in the choices for connecting a Wallet. A QR code should appear. 2. In Argent, click "Scan" on the main page, and scan the QR code. You should see a popup asking to authorize zk-sync. Accept it. 3. Deposit some funds into the zkSync protocol. Once completed, when you wish to pay your friends. Send them funds using zkSync. To do this, simply go back to the site, reconnect Argent via WalletConnect, and transfer them tokens. 4. You're done. If you have a lunch group or a group of friends that pay between each other a lot, enjoy a cheaper way to send paymets between friends. ##### Your wallet, Unlocked (Risk: MEDIUM LOW) > By now you may have used the WalletConnect feature on your Argent Wallet. This allows for a seamless connection between a complex web Dapp and your Argent Wallet. Occasionally, some applications will not have WalletConnect integrated. In this quest, you will create a side Metamask account and properly store the seed. If you run into an app that doesn't have WalletConnect, don't fret. Just use Metamask. 1. On your computer using a Chrome or Firefox browser, [install the Metamask Browser Extension](https://metamask.io/). 2. Create an account. Select a strong password that you can remember. A common good security method is to use 6-7 words that generate a memory in your brain that is easy to remember. You may also use [dice](http://world.std.com/~reinhold/diceware.html) to generate a random phrase. You may store this password in a secure password manager you can trust. 3. When creating an account, copy your seed phrase on a piece of paper and store it somewhere safe. ***Do not store your seed phrase on any computer.*** 4. You're done. This wallet can receive transactions from your Argent Wallet. You will need this browser extension wallet to do more complex DeFi Quests that require full browser Dapps. ##### Interest Rate Hacking (Risk: MEDIUM) > When interest rate hacking, you seek to borrow an asset with a low interest rate, just to buy another asset and supply liquidity at a higher rate. Since you're borrowing against your existing assets at a low rate, and supplying at a higher rate, you have a low risk arbitrage opportunity. Over time, this can lead to significant profits, while still keeping you exposed to your existing assets (ETH). You also may lose money if your assets have signficant changes in price, so ideally you will do this with only stablecoins. Also, if ETH's price drops significantly, you may get margin called and have your ETH liquidated with a penalty, so be sure to watch the price of ETH and only borrow limited amounts of tokens to keep your debt to asset ratio high. Good luck! > This will only be usefull if you have two assets with a large difference in APR/APY, and the ETH supply rate is lower than both. If the ETH supply rate is higher than any stablecoin asset it's more profitable to supply an entire chunk of ETH into your lending app. 1. Supply your Metamask wallet with $110 worth of ETH. The $10 here should cover any gas transactions required. 2. Go to your browser and go to the [Compound browser app](https://app.compound.finance/) and sign in with Metamask. 3. Look for any stablecoin asset in the Supply column with the **HIGHEST** APY. This is your target asset. Next look for any stablecoin asset in the Borrow column with the **LOWEST** APY. This is your borrow asset. These two assets will be your interest arbitrage assets. 4. Supply Compound with $100 worth of ETH by selecting ETH in the supply column. 5. Next, borrow the borrow asset from Compound. Select the stablecoin asset in the "Borrow" with the lowest borrowing APY. Borrow $15 worth of that asset. 6. Go to [1inch.exchange](https://1inch.exchange/) in a separate tab, and exchange your borrowed asset for the target asset. 7. Once done, supply the target asset into Compound. 8. You're done. Now you still have exposure to ETH, while you are earning high interest on an asset who's value you borrowed. Note you could have liquidated all of your ETH in 1inch to the token with the highest supply, but then if ETH's price rises significantly, you won't get any returns. In this case, you still have all the ETH you started with, but you're taking advantage of high interest yield. ##### Suggested Readings - [Are Hardware Wallets Good Enough?](https://www.youtube.com/watch?v=3zNVDIz6Snw) - [How does MakerDAO work to create the Stablecoin Dai?](https://www.youtube.com/watch?v=2lxc7qCsvF8&) ### Advanced ##### Leverage Engineering (Risk: HIGH) > In this Quest, you will have $100 of value in ETH, but you will leverage that $100 to expose yourself to Bitcoin. After doing this, if Bitcoin's price rises, would have profited since you can sell the Bitcoin and return the borrowed value with a small amount left you can keep for yourself. > This quest is risky because MakerDAO will margin call you and liquidate your ETH if the price falls below a certain amount. Be sure to look out for the price of ETH and immediately close this position if ETH's price rapidly falls. 1. Go to [MakerDAO Oasis](https://oasis.app/) and connect either your Metamask acount, or use WalletConnect to connect directly to your Argent Wallet. 2. Click "Borrow" and create a vault that will allow you to mint Dai.Supply $100 of ETH into the vault. 3. Borrow $15 of Dai. 4. Go to [1inch.exchange](https://1inch.exchange/) and purchase $15 worth of renBTC. 5. You're done. If the price of ETH goes up, as well as the price of Bitcoin, you need to liquidate only enough renBTC to cover the borrowed Dai. Anything else is profit that you can keep. For example, if the price of your Bitcoin goes to $20, you can sell it for 20 Dai, pay back the 15 Dai to MakerDAO, and profit 5 Dai. All while keeping your exposure to ETH and not selling it. ##### Hardware Wallets (Risk: HIGH) > Hardware Wallets offer the most secure alternative to securing your assets. I highly recommend once you get over $1000 to invest in a secure hardware wallet. Below are choices I recommend for beginners. Ledger Nano X (~$60) - Ledger wallets are a secure USB that can store assets. These connect to Metamask and are relatively cheap. These have a secure chip system as well as USB connectivity to connect to your Metamask account. When transacting, you will just have to connect your USB to Metamask and you can access any browser based Dapp. - [Purchase here.](https://shop.ledger.com/pages/ledger-nano-x) Trezor Model T (~$200) - Model T's have the most security available in the smallest form factor. These devices have excellent hardware security as well as an added mode with Shamir Secret Sharding, which allows you to make multiple seed phrases, which you need some number of them to restore your wallet. Ideally you will store the seeds around your house and ask friends to store them so that if your home is compromised or lost, you can combine enough seeds elsewhere to restore your wallet. - Model T's have recently caught slack for actually [being insecure](https://blog.kraken.com/post/3662/kraken-identifies-critical-flaw-in-trezor-hardware-wallets/). You must create a password when creating a new account on the device because an attack has been found which can reveal your seed. It's unclear whether a new device or firmware will be created which helps mitigate this attack, but if you do choose this route, be sure to use a password to fully secure your device. I would personally avoid these devices until a new model is sold which helps mitigate this attack. - [Purchase Here.](https://shop.trezor.io/product/trezor-model-t) ##### Liquidity Mining 2 (Risk: MEDIUM) > As with Liquidity Mining, this Quest uses Balancer Pools, which are Market Makers on steroids. Instead of using a single pair of tokens, Balancer pools utilize multiple tokens in one pool, allowing you to maintain specific weights of assets in an automated fashion. This is essentially like a Automated ETF that maintains a basket of assets at specific percentages of value. Over time, the overall portfolio should slowly grow while washing out large changes in value in any one asset. If one asset's value grows, it will be sold to purchase the other assets to maintain the ratio. If one asset's value drops, other assets will be sold to maintain the ratio. 1. Go to [Balancer](https://pools.balancer.exchange/) and use WalletConnect or your Metamask account. 2. Get $30 in Dai, $30 in ETH, and $30 of renBTC using [1inch.exchange](https://1inch.exchange/). 3. Create a pool that holds 30% ETH, 30% Dai, and 30% renBTC. 4. You're done. You should receive BAL tokens over time, as well as see your pool slowly increase in value over time. ##### Play with Prediction Markets > Prediction markets are an extension of derivatives contracts. They can be used to bet on sports, buy insurance for a flight, or help predict the next wave of a pandemic. If you are interested in any of these check out Augur. 1. Join the [Augur discord](https://discord.gg/CNnH6uM). 2. Go to the [Augur app](https://www.augur.net/). 3. Have fun and trade. Before entering a position, go to the #trading channel in the Augur discord and ask how to identify if the market is valid. Don't trade more than you're willing to lose. ##### Money Legos > This is not necessarily a list, but serves as a way to show how you can "stack" money legos. - Combine Leverage Engineering with Liquidity Mining. Get ETH and renBTC, but then supply the tokens as liquidity in Uniswap or Balancer. - Borrow Dai from MakerDAO or Compound, and buy large chunks of PoolTogether tokens. This will increase your chances of winning while maintaining exposure to ETH, only at the APR price. - Try anything else! You can mix and match services at will. ## Next Steps If you've made it to here doing all of the above, you probably have a better understanding than 80% of cryptocurrency enthusiasts about the direction decentralized finance is going. There's a few more topics to get involved in, or you can specialize and focus on just one or two areas. Here's a few that might be interesting to you ### Join a Decentralized Autonomous Organization Getting involved in Decentralized Autonomous Organizations are a great way to get involved in a social group. Take a read on what the [MolochDAO](https://medium.com/@simondlr/the-moloch-dao-collapsing-the-firm-2a800b3aa2e7) is and look around for organizations to join. ### Register and Address on the Ethereum Name Service When you created a Metamask wallet, your address was a hexidecimal set of numbers and letters that are far from mnemonic, let alone memorable. Register a .eth domain on the [ENS](https://ens.domains/), and lock in a unique address that binds to that address. Many wallets read from this registry, and it makes it simple to ask someone to "pay you at robertjohn.mycoolwallet.eth". You can also rent subdomains, and possibly make money by having a useful and mnemonic domain that you own. ### Stake ETH in Ethereum 2.0 Ethereum 2.0 is just around the corner. In ethereum 2.0, instead of computers hashing the next transaction, they will simply approve transactions, and stake their own ETH to insure transactions are not fraudulent. While becoming a general ETH2 node provider requires a lot of technical chops, joining a pool may be a lower risk alternative to join together people with technical expertise and people who only want to risk a small amount of ETH. [Rocketpool](https://www.rocketpool.net/) will likely become a standard in allowing anyone to stake their ETH to validate transactions. By contributing to the pool, you can earn ETH as Nodes validate transactions, and you also can join the pool itself. ### Get a DeFi Debit Card A number of credit card companies have recently became more mainstream that allow you to ditch your bank account altogether and spend cryptocurrency anywhere VISA is accepted. With this, you load up your card like any other debit card with stablecoins, bitcoin, or Ethereum, and you can spend it Some options are below. - [Bitpay](https://bitpay.com/) - [Crypto.com](https://crypto.com/en/cards.html) - [Monolith](https://monolith.xyz/) ### Suggested Readings - [Why the US Needs to Have a Digital Dollar](https://www.youtube.com/watch?v=N6fjVmjHnwg) - [On Radical Markets](https://vitalik.ca/general/2018/04/20/radical_markets.html) - [Readings on Bitcoin Philosophy](https://nakamotoinstitute.org/crash-course/) - [Why tokens may not be for consumers](https://www.youtube.com/watch?v=YUxTvBxVzn4&)