How to take the steps in decentralized finance (DeFi)

The first steps in DeFi

Getting started in DeFi may seem like rocket science to many new users, but the reality is that it is easier than it seems, although it can get more complicated depending on what you do and what options the protocol presents. In this case, we will present you the case of AAVE, one of the most complete protocols of its kind.

Step #01: Choosing the wallet

The first step in getting started with DeFi is choosing a Web3 wallet. In this case, the best wallet is MetaMask, as it is more integrated into this type of application, to the point that it has almost become a standard. You can learn everything you need to install and configure your MetaMask wallet in our article How to install and configure the MetaMask crypto wallet in your browser.

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Step #02: Getting to know the DeFi protocol

The second part is the most complex part of the process. They consist of knowing the protocol. This is the point where you should spend more time reading and getting to know who is behind the project, how it works and supports it, what it offers you and how you can participate. The projects generally contain all these specifications in documents known as “white paper”, which is a technical document that explains the operation of the project and its protocol. Since this document is generally very technical, a good idea after reading it is to go to the official forums or channels (usually Telegram and Discord) to clarify any doubts.

Other documents prepared in a simpler way are usually called “light paper”, which is a non-technical explanation of the protocol and ideal for beginners. If it does not exist, a good place to learn about the project is its documentation. There you can find explicit information (technical and non-technical) about the operation of the protocol.

You should take your time knowing and reading about the protocol. Learning should be your first objective, since it will prevent you from doing things wrong and having bad times. It is preferable to spend a week or a month reading, than a lifetime regretting not having done so.

In this example, we are talking about AAVE, its online documentation can be seen at this link . And his white paper, you can read it at this address .

Step #03: Connecting to the protocol

Now that you know the protocol and have your wallet ready, including the money you are going to use to interact with the wallet, the next thing is to connect to it. To do this, you just have to go to the official website of the AAVE protocol :Uniswap clone software

Once there, just click on the “Launch App” button and it will take you directly to the AAVE dApp. Once in the dApp, you will have to click on “Connect Wallet”. This will start the connection process with your MetaMask wallet:

At this point, you just have to accept the interaction with the wallet, by clicking “Next” and “Connect”. At the end of the process you will already be connected to the AAVE dApp, and you will be able to use it.

Step #04: Operating on the protocol

Now, AAVE is a protocol that allows us to perform multiple tasks. We can, for example, inject liquidity into the AAVE pools. We can do this in exchange for receiving a small commission in the form of APY, which is the annual percentage rate for each coin we add to the protocol. This liquidity will be used to grant credits to third parties, who will pay commissions and from there our profits will come. We can also stake within AAVE, to gain voting power and serve as collateral liquidity providers for the protocol. In this way, in the event of a hack, the protocol will be able to use that liquidity. At the same time, the protocol will replenish the money within a period informed by the governance. A security measure that seeks to keep the protocol running in the worst case.

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As a good DeFi protocol, AAVE also allows us to participate in its governance, something we can do directly from its governance module. Finally, we can request loans on the platform, in order to use said loan in the way we want. It is important to know that to request a loan we must inject liquidity, which will be used as collateral for the loan that we have requested.

Step #05: Understand and know the commissions

A fundamental point that you must understand is the commissions. Commissions in networks like Ethereum can be a real nightmare and even more so if you do not understand their dynamics. As a general rule, making transactions in Ethereum is quite cheap. For example, moving the $90 of ETH from our AAVE test can cost less than $2.

Cost of operations in Ethereum

So why does AAVE charge us so much? The answer lies in smart contracts. The execution of smart contracts consumes computing power, a computing power that must be paid for using Gas. Uniswap clone ETH tokens consume very little Gas and therefore their cost of operation is quite low. In fact, more elaborate tokens like USDT are also quite cheap. However, everything changes when we talk about DeFi. The reason? DeFi smart contracts are complex and therefore require huge levels of Gas. Adding liquidity consumes a fairly high level of Gas, but withdrawing it usually consumes more Gas. This is the reason why many DeFi users are surprised that when trying to withdraw money, the commissions are in many cases higher than $100 or much more.

In this case, commissions are governed by a very basic principle. The more complex the platform and its smart contracts are, the more expensive the operations that we carry out on them will be.

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