Practical Guide to DeFi (beginner)

Decentralized Finance (DeFi) is a fast-growing sector in crypto that aims to recreate traditional financial services—like lending, borrowing, trading, and earning interest—without banks or intermediaries. Everything runs on blockchain networks using smart contracts, giving you direct control over your funds.

This guide will provide you with the basics to start on your DeFi journey. Always remember though: no matter how much you like this guide always stick to the number one rule in DeFi:

“DYOR - Do Your Own Research”

Good luck!!

A. What You Need to Get Started

Crypto Wallet:

Choose a non-custodial wallet (like MetaMask, Rabby, or a hardware wallet) to store your crypto securely. Set up your wallet, back up your recovery phrase, and never share it with anyone. Suggested: Rabby wallet for the best DeFi experience combined with a hardware wallet for best security.

Crypto Assets:

Depending on the blockchain you want to use: first buy the token used for gas. For every on chain transaction you will need to pay a little amount in the native (gas) token. Most DeFi apps run on Ethereum based blockchains, so buying ETH is a good start. For Solana you buy Sol, for Sui you buy Sui, etc. Easiest way to buy this first (gas) token is on a centralized exchange (CEX) like Binance, Coinbase, OKX (depending on your location). Make an account and send your dollars/euro’s; one more click and you bought your first crypto. Now send the bought (gas) token to your crypto wallet and you are good to go.

To get more assets on chain, either swap your native gas token to other tokens after sending it to your wallet or repeat the process and buy them on the CEX and send them to your crypto wallet.

Basic Security:

It is best to start with reputable DeFi platforms with audited smart contracts. Audits should be available on the projects website and/or documents. Also relevant: doxed team, duration the project is live and the total value locked (TVL). More is better.

Defillama is the best website to look up information about DeFi applications. And very important: alway use Defillama to look up the url of the application website and bookmark it after. Most people get rugged or lose money by using a fake website.

https://defillama.com/

In the next section we will take a look at the key DeFi applications, the basic strategies to make money, some tips and risks involved.

B. Key DeFi Applications and How to Use Them

1. Decentralized Exchanges (DEXs)

What they do:

Let you swap tokens peer-to-peer, directly from your wallet, with no central authority or exchange needed like Binance or Coinbase

Example: Uniswap, SushiSwap, Velodrome

For more information about DEXs: https://defillama.com/protocols/dexs

How to use:

Protip:

Use an Aggregator. An Aggregator will look for the best price on all available DEXs, so you always get the best deal. The best ones out there are:

https://swap.defillama.com/ (Ethereum chains)

https://jup.ag/ (Solana)

2. Lending Markets

What they do:

Lend your crypto to earn interest and/or borrow crypto by providing collateral. Use the borrowed crypto in DeFi or pay for that car in real life while keeping your precious BTC as collateral and pay off the debt in the future when BTC price went up.

Example: Aave, Compound, Morpho

For more information about lending markets: https://defillama.com/protocols/lending

How to use:

C. Using DeFi to make money

You can use the above applications to either swap or lend/borrow for yourself or… you can be on the other side: the side that makes it possible for people to swap and lend. Or even better: the side of DeFi that earns a passive income by providing the liquidity needed for these applications to merely exist.

When using Always make sure you understand where the money comes from. There are 2 sources for yield (rewards): real and incentivized. Real yield is money that is being generated by the application because it is being used. It’s the fee that users pay to swap or lend. Incentivized yield means the project itself is printing extra tokens to incentivize usage of the platform, trying to create a flywheel and attract users.

1. Staking

What it is:

Staking in DeFi is the safest and most passive option. In short: you lend your tokens back to the blockchain (or platform) to help validate transactions and secure the network. In return you will receive an interest paid out in the native token from the blockchain.

A disadvantage of staking is that your tokens will be locked up. To solve this problem ‘liquid staking’ platforms were introduced, where you receive a copy of your staked token, called a liquid staking token. This token accrues in value overtime (staking rewards are compounded in its price) and can be used again in DeFi applications like described above where stETH is an example of a liquid staked token.

For more information about liquid staking platforms: https://defillama.com/protocols/liquid-staking

How to use:

Protip:

Liquid staking tokens is regarded as one of the safest ways to earn a decent yield. See the subject ‘looping’ below.

2. Yield Farming

What it is:

Provide liquidity to DEX pools and earn a share of fees (real yield): for every swap, users pay a fee to the liquidity providers. Basically: you are the BANK.

Bonus: DEXs often reward liquidity providers with extra tokens to attract extra liquidity to the platform. Deeper liquidity means lower fees for swappers, which will attract users, which means more fees, which attracts more liquidity providers -etc. This is the flywheel used by most DEXs.

How to use:

Protip:

Sell the reward token, unless you really believe in the platform and the token-utility. Most reward tokens (95%) will be dumped unless there’s a real benefit to its existence.

3. Lending and borrowing

What it is:

Bonus: lending market use the same flywheel as DEXs by rewarding borrowers and/or lenders with extra tokens as rewards (incentivized). In some cases this even means you can get paid for lending out your assets.

How to use:

Protip:

The most common and safest strategy on lending markets is called: ‘looping’. Looping is borrowing and lending correlated pairs like ETH/stETH:

Lend stETH > borrow ETH > stake ETH for stETH (repeat).

If the interest you receive on the lending site is higher than you are paying on the borrowing side, you are compounding and increasing your yield with every loop.

Tips for DeFi Beginners

Use small amounts at first to learn and minimize risk.

Minimize asset risk:

Start with non volatile assets, like stable coins or BTC/ETH

Track your positions and yields. Withdraw or rebalance as needed.

DeFi evolves rapidly—follow reputable news sources and communities.

Risks to Watch Out For

Even audited contracts can have vulnerabilities.

Providing liquidity on a DEX can lead to losses if token prices change significantly

Only use lending markets with a high TVL to minimize risks and don’t use volatile assets as collateral. Make sure your ‘health ratio’ stays above 1.5 or lower depending on your risk appetite (= collateral to cover your debt).

Only use official links and never share your private keys or recovery phrase.

the more interesting you are for hackers and scammers. Use a hardware wallet and buy a (cheap) laptop for only crypto transactions and nothing else. Stay away from downloads.