It is not a prerequisite to know swimming to enjoy a cruise ship around the Globe, yet knowing the Dos and Don’t during the cruise surely helps a ton to avoid potential mishaps during the voyage. I truly hope you will never need to use those weird things called Life jackets but you must not forget to check where those life jackets were placed on the deck. We will run a quick orientation on some of the Dos and Don’ts here while you are already sitting on the DeFi ship and I welcome you on board with my wide open heart and arms. Now, Rule No. 1: All that you hear about Defi (or in a high-level view anything about Crypto) from any sources, let that be a human or bot - tweet, blog, Reddit post, breaking news or whatever, it might be or might not be always right or even true. So as per rule no 1:
Always do your due diligence (DYDD). Another way of saying so is: Do Your Own Research (DYOR). How? We will learn a few techniques soon. Stay tuned.
Rule No 2: Never forget rule no. 1
I extend my credits for these two rules to my investment Guru Warren Buffet. Warren is regarded as one of the great investors of this century. He gave us two rules for investing in traditional finance - First Not to lose money and second not to forget the first rule. I slightly tuned both the rules to match with the frequency of the crypto world and Defi. These two rules worked miraculously for me and I hope they will do miracles for you too.
The reason I am stressing so much on DYDD or DYOR is critical at this point in time in the Defi or Crypto life. You virtually can’t avoid hearing from multiple social media posts or friends that some dude made millions by selling some monkeys and another got doomed with a few more million by buying some cryptos. Oftentimes, this situation arises either due to the availability of too much information or the non-availability of some very crucial information. With time and progress in the overall ecosystem of the Crypto world, you may not be required to take so much trouble yourself to carry on the DYOR, but for now, it is essential to keep yourself safe and secure.
Flag Off Ceremony
Similar to traditional finance there are multiple divisions in Decentralized Finance as well. Let’s have a quick drill just to make ourselves accustomed to the basic terms. As I have mentioned I will try to avoid the technicalities behind each vertical to the highest possible level.
In traditional finance – Commercial Banks are the most familiar and relatively easier-to-understand segment of the entire financial ecosystem. So, we will try to make a side-by-side comparison of Defi with the most common functions of the Banks first. Bank Account vs Defi Wallet: In the traditional banking system if you want to open a savings or checking account you need to visit the bank of your choice or in several countries you may also get the processing done online. After a few sets of documentation exchanges, you are provided with a Designated Bank Account Number for your use. Now, you are good to go with any sort of transaction you may like - such as Receiving or Paying Money via your bank account.
Easy isn’t it? Yes, up to some extent.
However, in the Defi ecosystem, since we already mentioned that the whole system is decentralized, that means independent of any centralized authority or organization, hence there is no such physical address or glittering office buildings to go into and get your account open. Here you have to take a few things into your own hands. Apparently, at the same time, you are the sole Bank Manager, Cashier, Accountant and Customer of your Banking conglomerate. You need to open a bank account for yourself in your own Bank.
Here we won’t call the Banks as “Bank” but we have a new name for them - “Wallet”; similarly we won’t call the Accounts as “Accounts” that we often refer to in the TradFi world; rather we baptized a new name as -“ Address”.
So now, to make any transaction such as Receiving or sending money in the Defi world, you will need to have a Wallet and Corresponding to that wallet an Address. Confusing? Don’t worry. It won’t be that tough, once you start doing it yourself. Trust me, it is much easier and more convenient than a Bank account opening. We will do the hand-holding.
Before we proceed let us try to address two questions that naturally pop up in our minds. How a bank can be decentralized let alone the transaction? Like you and I, almost none heard the word Decentralized Finance or DeFi less than a decade back. But, hey remember history tells us that no one ever heard the word motor car just a little more than a century back too. You may find it fascinating that there were huge protests almost all over the United States of America as well as in a few other parts of the world against the motor-driven carts. Even some politicians tried to pass a law in the early 1900s to ban all motor cars from plying on the roads of the United States of America because according to them “the motors often scare the Horses”.
Ah !!
Imagine a world today, had those laws would have still been in practice!! :(
Anyways, going back to our question of decentralization, we need to have a very brief exclusive inner-circle tour of the current banking system. Let’s see what exactly happens once you go inside that large building to open your Traditional Bank Account.
You need to give your documents, often call as KYC or Know Your Customer documentation. Such as your Identity, age, address etc.
Once you are done with the documentation-providing process you can simply enjoy your complimentary cup of coffee and observe the pretty lady or the smart handsome guy behind the computer screen at the other side of the table, punching her or his keys on the computer keyboard really hard - often double checking the details with the documents you have provided earlier. This is the data entry process for the bank’s front office Clark. He/she is trying to Keep a Record of your Details in their Computer Network System.
Once the Data entry has been done, it will be manually or automatically forwarded to another department often called -the processing dept or middle office. Here the concerned person/machine who has access to your prima-facie data will allocate a Distinct Number against your Name and Other details and add those details as a new Entry on their Bank’s Customers’ Ledger Entry Book. This distinct number will identify and certify you as Real You in case suppose there were two or more customers who have similar names, ages, initials etc. This number is often called as the Account Number.
Once this account number got registered into the Bank’s Customers' Ledger Entry book it will be further forwarded to another department often called - the back office, where your account number will be entered into the Bank’s Financial Ledger Book. Once this step is done, your account gets ready to receive or withdraw money. A ledger book is nothing but a record-keeping system that can be updated as and when required with the relevant amount of data or money received/withdrawn during a specific period.
Once you start receiving money into your account, there were few more actions start taking place at a rapid speed at the back office of your bank. Banks often update their financial ledger first before sending the money into your account. They would check if there were any fees to be deducted for that particular transaction or do you have any previous dues etc. Accordingly, they will deduct from your account the charges including their service fees, processing fees, transaction fees, maintenance fees and many more as may apply to you according to their terms and conditions before they credit your account with your expected (read as, far less than your initial expectations ) amount.
I may be a little bit too mean on that above explanation, they don’t really do all those deductions in one go, every time though. They do it periodically - often quarterly, half-yearly or annually. Hence most of the time we don’t even realize how much we have lost to keep the banks alive until one morning we sit and start doing all the math ourselves. I remember once getting mad when I discovered that my then bank had 27 different fees associated with my account. Later, I heard that in several other countries the condition is even worse. This was one of the business models that gave birth to today’s Modern Banks more than a century ago and the model still seems to be working quite well. Since commercial banks have a business to run and have multi-millions - if not always multibillion-dollar expenses hence they too need money to become profitable. More is always better.
Although we cannot entirely blame the banks for all those charges, sometimes there seems to be too much to pay against the services we receive. Personally, even though; I am a hardcore Defi Advocate - I don’t want to nullify the positive effects of today’s banks in the modern world entirely. There are multiple reasons behind supporting Defi. Please do not misunderstand that charges are the only reasons. No, the fee is only the tip of the iceberg. I am taking the example of fees since we all could easily associate with that. I assume that if you ever had a traditional bank account you must have dealt with some shorts of charges too. Hence it will be easier for us to understand and explore. Mind you, commercial banks - that take fees from you against their services - interestingly enough; they also need to bear several charges to satisfy somebody else. They have a Big Brother - we call them The Central Bank in most countries or The Fed in the USA. Man, it’s a dog-eat-dog world!
That is pretty much the most basic structure of a traditional banking system for opening and operating an active Bank Account.
However, in the case of Defi, all the first four steps from the above and also a significantly higher percentage of fees from the next steps get completely eliminated. Since, as mentioned above you will be the sole proprietor of your banking system you won’t like to pay nor charge any fees to yourself, I suppose.
What Exactly happens inside the Defi Eco- System ??
In defi once you equip yourself with a wallet and its address you are all set. There are several wallets available for your use. However, we will stick to one of the oldest, most popular and easy-to-use wallets called Meta Mask. It is as easy as creating a new email id. Follow the step-by-step process below.
Go to metamask.io or click the below URL and click on the “Download” button. It will take you to the relevant store to download the extension or app according to the browser or device you are using.
2. Once you are done with the download, follow the instructions on the screen carefully. It will prompt you to provide a password to your wallet and also ask you to keep a backup of your Secret Recovery Code, which is generally a 12-word phrase. Remember that this is the only access method to your own BANK in case of emergency. Without this 12-word phrase, it’s almost impossible for you or anyone to get access to your wallet. Keep it secure in a place that you think is the best and most relevant. You may follow the FAQ section for more details:
3.Now, since you got your Metamask setup, you are ready to start transactions in your Wallet right away. Many transaction types are possible to do via your newfound wallet, yet we will stick to receiving and sending money as we did in the previous example of commercial banks. Before proceeding let us have a quick look at the Metamask Interface.
The lengthy alphanumeric characters that are shown below the “Account 1” is your bank account number or as you know we will call it the Wallet Address (in the above figure it is showing as 0x382…9be0). You may like to copy the address from your wallet and paste it into any text/word document file just to have a feel of this new, big - odd looking account number. This wallet address is the Public Address that you will use to receive and send money from your respective account. This address can be shared with others, it will work exactly the way a traditional bank account does. Whereas the Secret Recovery Keys that you have seen and saved in your safe locker are only for your eyes. You must never share that with any 3rd party at any cost. You might have also noticed that towards the left of the Meta Mask’s mascot - “the Secretive Fox” - there is written “Ethereum Main Net”. Ethereum is the name of the underline blockchain ecosystem in use. There are many other supporting blockchains you may like to use with Meta Mask. We will explore that territory in the later parts of this series. For now, you may consider Ethereum as the “Brand of the Car” you are going to drive within the DeFi world. If you are very much curious to learn more about Ethereum, feel free to visit www.ethereum.org. It is more technically inclined. As promised earlier, I will avoid explaining technical staff and try my best to make sure that you can ride confidently within the whole DeFi ecosystem without needing to know any of the behind the scene complexities.
Now, if you click on the “Buy” button and scroll down you will find multiple options to Buy/Receive “ETH”. We will for now take ETH as equivalent to your country’s currency, that is USD, EUR, GBP, JPY, INR, VND, THB, MXN, BRL etc. It will be helpful to remember that ETH is the short form of the Crypto Currency - “ETHER” that is used within the Ethereum Ecosystem. The real-time monetary Value of ETH is not necessarily the same as your nation’s currency value. At the time of this writing, the value of ETH is considerably much higher than any of the physical currencies currently available globally. Feel free to explore the options yourself but avoid doing any transactions right now. We will do that together in the next session.
3. If you click on the “View account” button you will be shown a QR code with the Account Number. Check out the number, does it match exactly with the one you copied earlier from the clipboard into your text/word document file? It should. This is your public wallet address which you can share with your friends and families to send you money in ETH as a Christmas Gift, Birthday Gift, or even payment for your product and services.
Cool !! Huh !!
You must have noticed that there are two more buttons below your Wallet Address as shown in Fig 3 . - “View on Etherscan” and “Export private key”.
Etherscan is equivalent to the Financial Ledger Book that we were talking about in the case of traditional banks. This is required to keep the records of your transactions in the Ethereum Blockchain. You can verify all the transactions in the ledger that you have done through that particular wallet using Etherscan.io. We will do that as well in the coming sessions.
The Private Key is crucial. As we have found that the Secret Phrase is only for YOU, and Private Key is also only for YOUR EYES. Don’t ever share that key with anyone. The Secret Phrase protects your overall Meta Mask Wallet from unauthorized access (imagine as your Bank’s locker/volt keys) and the Private Key protects your Particular Account ( imagine as the ATM PIN for your Bank’s Debit Card). You must not ever share this key with any 3rd party as well. Anyone having access to your private keys can manipulate your account and steal your money. Be EXTRA careful to deal with that button. In most cases, you should avoid exporting your private keys unless a few exceptions for advanced users may be in the future. For example: if you need to export this particular account to some other wallet you will use the export private key option. For now, it is better to leave that part to rest in peace. Do not export and do not share your Private Keys with anyone.
Now, if you try to go a step back and compare the process of the traditional Bank Account opening and the Decentralized Wallet Opening you will notice that all the Front Office, Middle Office and Back Office jobs were also get done with a few mouse clicks. All these took place without the intervention of any centralized force behind the process. In this process, you are the only party involved from the beginning to the end. Here, the various departments’ roles - from the traditional bank’s account opening process - were played by a set of a distributed computer network called as “Nodes” and the job of the traditional Ledger is taken care of by a new and fast-evolving technology called “Blockchain”.
Since the Nodes and the Blockchains are not controlled centrally by any organization or any entity, the whole concept of our new system of banking or wallet opening and transactions via these wallets make the system entirely decentralized leading to the introduction of Decentralized Finance or DeFi.
That is quite a lot for today.
We need to have a break and relax for a moment. What about meeting you tomorrow at the Defi Dance floor? We will have some fun.
The only pre-requisite for entry into the club is to play by the rules.
Catch ya tmrw!!
P.S: I have noticed a number of publishing / formatting errors on this page. I am not sure if there were any updates going on in the Mirror.xyz. Apologies for the not so decent looking layout. I will fix it once we hear back from Mirror.xyz with any updates.
Thanks.
DefiZen