How to Navigate Your First 21 Days in DeFi
Level 1 - NGMI
Welcome Avatar! People enter the world of crypto, DeFi, NFTs, web3… Whatever you want to call it, and are often faced with a challenging user experience.
Crypto has a learning curve. We’ve spent the last 8 months educating people on the industry and if there’s one thing we’ve learned, it’s that you cannot teach someone crypto in a day, or even a week. DeFi today is still the wild wild west. The protections available to you in the regulated world of traditional finance are not available in DeFi. But. The traditional finance world gives you 0.50% interest rates. DeFi can give you 10%, or 20%, or 200% or more.
Instead of shying away from the complexity of DeFi, embrace it. The complexity is your alpha, your edge. It’s why you can beat returns in traditional markets and zero banks.
DeFi can be a perilous place. That’s why we started writing the DeFi Education substack in the summer of 2021. We dive deep and vet DeFi apps, tokens and yield farms so that you can access all the benefits of DeFi, avoid the pitfalls and save time.
In today’s post, we will lay out a roadmap for you to get up the learning curve efficiently with guardrails so that within 3 weeks you know your way around the space.
Days 1 – 3: The On-Ramp
You decided it’s time to check out what this whole crypto thing is all about. You’ve probably heard about it on the news, may have a friend who made thousands of dollars from selling a picture of a sandwich, or simply heard about DeFi enough times on Twitter.
You will spend the first few days getting set up on exchanges such as Coinbase, Binance and/or FTX (if you are fine connecting your identity to your crypto) and/or looking into peer to peer options to purchase crypto. You will also purchase a hardware wallet such as Ledger or Trezor, and install Metamask.
Note: If you have more than $5-$10K in crypto, you need to get a hardware wallet. If your funds are on an exchange, you need to get them out to a wallet you control. Crypto held on an exchange quite literally is not yours: “Not Your Keys Not Your Coins”
VPN
Before you start using DeFi we need to talk about privacy and security. When you use DeFi all your transactions are public. This means you should avoid linking your real name to any crypto addresses and you should always connect to a VPN before making any transactions.
Since most commercial VPNs are rubbish we’ll go ahead and link you to the best information on setting up (link also explains why we can’t answer questions on whether XYZ VPN is okay to use).
With your first task complete, you should be able to visit a website like WhatIsMyIpAddress.com and see the VPN IP address (in a different geographic region from you) rather than your ISPs IP address which usually shows your town or city.
KYC
If you’ve never provided personal information to register at a crypto exchange, that’s great.
If you have, you might want to use this account for testing purposes. Some crypto exchanges allow you to withdraw directly to Binance Smart Chain or Fantom Opera where transaction fees are lower and you can practice using real DeFi applications with only a few hundred dollars, so nothing to lose if you make a mistake while learning.
Even if you’ve already KYC’d with an exchange, you’ll want to avoid linking that account to wallets containing more than a small amount of crypto. For your privacy we recommend only obtaining crypto Peer to Peer or by earning crypto directly. If you messed up at this stage, just figure out the best way to unwind and start over – we don’t know your specific circumstances. For learning the basics, onboarding to crypto via a KYC’d exchange then transferring to your own wallet is fine.
Metamask
This app is how most people manage their crypto on Ethereum and compatible networks like Fantom Opera. You’ll need to download the browser extension for Chrome or Firefox. Use the official site metamask.io or the official app stores.
By the end of this step you should have a funded Metamask wallet on Ethereum.
Or, if you had funds in a central exchange withdraw a few hundred dollars to your Metamask address on Fantom (buy and withdraw FTM tokens).
Further reading: we have many free posts which we’ll link throughout this guide. You’ll start with the high level basics.
Days 3 - 7: DeFi Transactions
DeFi in simple photos and how to make your first transaction is our evergreen post for beginners. As Ethereum is more expensive to use right now, we’re going to recommend you use the Fantom network for learning. Ethereum can cost $10-$70 per transaction whereas Fantom costs less than a cent, making Fantom a better place to experiment as a beginner. We don’t recommend regular use of Ethereum DeFi for accounts smaller than $100,000 due to gas fees.
Using DeFi you can:
Borrow dollars against your crypto holdings
Lend cryptoassets to others to earn interest
Swap between tokens using a decentralized exchange
Invest in protocols and help govern how they are run with voting
Earn yields by providing liquidity and staking tokens
Setting Up
Once you have either transferred from an exchange or received crypto from someone else, your account balance should appear in Metamask. If you are on Ethereum, you should have ETH to use the network and if you’re on Fantom you should have some FTM.
Next steps
View your account in the block explorer (input your wallet address on Etherscan or FTMScan, or access easily via Metamask extension) or services such as Debank
If you have funds on Ethereum, bridge a few hundred dollars in value to Fantom using the Synapse Bridge
Once you have funds on Fantom, transfer a small amount of crypto between your addresses (you can have multiple addresses – called accounts in Metamask) just to test out how crypto works, get comfortable moving between addresses including confirmation times and viewing progress in the block explorer
Follow our guide on swapping tokens using Spookyswap Exchange. Just follow the instructions on swapping tokens for now - we’ll give you a better farm later in this post.
*Important* Always send a small amount first to test out a new wallet address before sending a significant amount. If you send to the wrong address you will not get that money back.
Basic Transactions
Now that you have a few hundred dollars of FTM tokens and know how to swap, lets make some small transactions. Try selling your FTM tokens for the DAI stablecoin, but make sure to leave at least 5 FTM for gas fees.
What is a stablecoin? In this example, DAI is a token which should always be worth $1. Stablecoins are important in DeFi because they are designed to peg to a stable value - this is useful for people who do not want to hold all their wealth in highly volatile cryptocurrencies. If you want to know more before you swap, we have a detailed articleon stablecoins.
If you received FTM directly to Metamask, you can test out “bridging” between different blockchains via Synapse Protocol. Bridging simply means moving assets from one blockchain such as Fantom or Ethereum to another one such as Avalanche or Binance Smart Chain. Bridging is a great way to store or move assets around on networks that have lower fees than Ethereum.
Week 1 Summary
You are following good security practice by using a VPN
You have stored your seed phrase safely and know never to give it to anyone, for any reason, ever
You’ve installed Metamask and sent funds to your address, which are showing in your browser wallet
You know how to use a block explorer to see your transaction history
You’ve used a bridge once and have completed a token swap
You understand why stablecoins are an important part of DeFi infrastructure (you’ll be using them to earn interest later)
Days 7 – 14: Using DeFi
Now you get to use DeFi. Refer to our glossary of terms as needed.
Lending tokens - lowest effort, lowest risk
The first thing you can do in DeFi to earn a greater return is to lend your tokens out for interest. You can lend any asset but the most popular/highest yielding is usually USD stablecoins (or a token which is in demand to be used in a high yielding farm). Aave and Compound are examples of token lending protocols.
Stablecoin farming - medium effort, low risk
For safer investments like ETH, the interest rate is often very low (~1%) as there is typically not much demand to borrow ETH. To get better yield on your ETH investment, you may wish to “farm yields”. Here’s how:
Use your ETH (or other crypto tokens) as collateral for a USD loan (similar to getting a mortgage on a house)
Use your borrowed USD stablecoins to provide liquidity on a DEX
Earn more in trading fees and token rewards than the interest rate to borrow → profit
Your risks are: one of the stablecoins breaks peg, resulting in loss of your funds. Or. A smart contract is hacked (either the lending protocol or the exchange you deposited on).
Mitigants:
Select well designed, reputable stablecoins that have remained pegged for years
Use protocols with audited, battle tested smart contract code (read our deep dives)
Consider buying insurance via Nexus Mutual
How to Farm
If you’re testing on Fantom, you already followed our instructions to swap nearly all your FTM for DAI, so you don’t need to borrow stablecoins to farm.
Note: you can farm with any pair of assets, not just stablecoins, but we think stablecoin farming is better for beginners as you don’t need to understand risks like divergence loss
We think the best place for beginners on Fantom right now is Beethoven X on Fantom. And the best risk:reward stablecoin pool is The Grand Steady Orchestra(USDC and TUSD - two top ten stablecoins with a stable peg history). You can earn 10% per year farming dollars in this pool just for depositing USD - this is at least 20x better than a savings account.
You’ll need to swap half your DAI for USDC half for TUSD. Then visit the liquidity pool page in Beethoven X and deposit your tokens. You’ll sell your BEET farming rewards every day or two, sell your rewards on the Beethoven DEX into USDC or TUSD.
Days 14 – 21: Lower Risk, Lower Capital Investment Ways to Profit
Airdrops
BowTiedBull readers received tokens worth at least $5,000 just because they registered an ENS name before the service launched their token.
Early members of the Discord server at the JPEG’d NFT lending protocol made 2-3 ETH in a day ($5,000-$7,500) from flipping whitelist-exclusive NFTs.
No, we’re not joking, or even cherry picking the most lucrative examples.
The fact is that regular participants in DeFi often receive whitelisted access to token sales, NFT mints or are outright handed money in the form of airdropped tokens which can be immediately sold for a profit.
Early users of Uniswap (DEX), 1inch (aggregator), dYdX (derivatives) and ENS (domains) were airdropped thousands of dollars worth of “governance tokens” in the respective protocols. These tokens are often given to users of applications to reward them for being a customer in the early days. It’s like getting a free can of soda when you go back to your childhood pizza spot.
Airdrop farming is a strategy of predicting which on-chain activity (using a protocol to borrow, swap, farm or sometimes other actions like donating to privacy-focused charities) is likely to result in receiving airdropped tokens in future. DeFi Llama maintains a list of tokenless protocols which may airdrop. You can also follow @DeFi_Airdrops on Twitter.
Airdrop farming can be lucrative and even VCs are doing it. A controversial example was an employee of Divergence Ventures sybil-attacking its own portfolio company Ribbon Finance to earn 702 ETH (~$2.5 million) though a process of creating hundreds of wallets masquerading as small users. The community speculated that the firm used insider information about the planned airdrop which would be unethical. Divergence returned 702 ETH to Ribbon’s treasury.
You don’t necessarily need to predict which activities will improve eligibility for airdrops - they are a welcome bonus for active DeFi ‘power users’ and help offset the gas costs of transacting regularly on Ethereum.
Recent airdrops for active NFT (OpenSea) users have included SOS, LOOKS, and X2Y2 tokens.
Community Participation
There are a few ways to profit here. Many projects have jumped on the NFT bandwagon: being an early or active / helpful community member e.g. participating in discord can often get you a spot on the '“whitelist”. To avoid gas wars, many NFT mints are gated to whitelisted wallets, which usually means you can immediately sell your mint for a profit on the open market.
If you are seen as a consistent helpful contributor, it is common to receive small tips, token airdrops, small stipends, and the opportunity to apply for grants. For those with niche skills, there is often the opportunity to earn a meaningful amount of tokens for adding value to the protocol. For example, the BowTiedBull team has allocated part of the allocation received for being an advisor to Synapse to contributors their protocol from the BowTied Jungle.
Being active in project communities also help you keep up to date with events happening at their project and the broader DeFi ecosystem. This can yield interesting opportunities for “event-driven” trades.
Another high reward opportunity is detecting governance actions early which will have a significant impact on the token price, and trading this news ahead of it being well known by most market participants.
Examples include treasury buyback plans which will have market impact, changes to tokenomics, and votes to add/remove key personnel. You can read our free post-mortem of an example trade here.
Day 21+
You are ready to start building knowledge and apply these lessons in different situations. In our substack we go over protocols in depth and vet them for you in advance, as well as lay out how we think about trades, farms, and the industry more broadly.
Investing in protocols - buying tokens
One of our most important posts last year was about Risk Management. Please read.
We sent it out the week of the historical all time high in Bitcoin, following the approval of a BTC ETF in the United States.
Many readers have told us that our advice caused them to avoid losses when they de-risked their portfolio or rebalanced their big winners (which were 1-2% degen bets) back down to a more realistic size (some had returned 4-500% in a few months and had grown to ~10% of portfolio!).
Airdrops are fine, whitelists on good projects can be a low risk ‘flip’. Investing your hard earned money in DeFi tokens requires a methodical and disciplined approach if you expect to come out ahead.
We’ll close with some further reading.
Start with our overview of the history of DeFi. Then pick topics which interest you:
Valuation: the basics of Market Cap and FDV and how to value a DeFi Protocol
Trading swaps and derivatives - perpetual swaps and options
What corporate mergers look like in the crypto space: the Fei-Rari merger
Some of our most useful and popular pieces include:
how to use your BTC to earn yield in Ethereum DeFi with REN - Moving Crypto Between Blockchains
how hedge funds are being replaced with code and how you can profit from automated yield management - Yearn Finance Part 1 and Part 2
We also provide analysis of breaking news and important developments in crypto.
Crypto: Providing for Your Safety and Security in Emergencies
Whether the new locked (veToken) model is good for investors
Paid subscribers have access to deep dives where we read the smart contract code, give opinions on software security, provide valuation models, improvement ideas, assess risks, and disclose which DeFi team members have invested in the protocol token (with reasons why, or why not). Often we find data you won’t see elsewhere, including custom scrapes of the blockchain to find user and revenue data and liaising with the team in Discord.
Paid Stack: This post is free as it is basic knowledge that everyone needs before taking a deeper look into individual coins/protocols. We are creating living/breathing documents coin by coin to get everyone ramped up on DeFi. If you’re interested in DeFi we strongly suggest you sign up as you’ll get direct access to research that usually costs $6,000 a year from competitors. And. We don’t take any ICO money so there are no misaligned incentives (unlike with the VCs who dumped $ICP - Insane Clown Ponzi - on the public for $90B in less than a few months!)
✓
In 2021 we covered the most well known DeFi protocols:
Uniswap, Sushiswap, Curve (DEX)
Perpetual and Dopex (futures and options)
Pendle and 88mph (interest rate derivatives / yield hedging)
MakerDAO, Alchemix, Aave (borrowing)
Olympus DAO and Wonderland (rebase tokens)
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.
Great post, but also watch out for the scams.
If you join discord, you get tons of scammers DMing you about token launches, other discords, etc. They're all scams. Delete and/or report. Even better change your settings so that people can't DM you unless you're friends on discord (only accept friend requests from people you know and have a reason to interact with). The project leaders never DM you first to reduce the ability of people to impersonate them.
If you say Metamask support or similar things on Twitter, you get scammer bots auto-replying. They're all scams. Avoid.
Check/use the website from the official docs or link. Sometimes the top Google hit is a scam website (eg raydium)
thank you for doing this