Have you ever heard of Decentralised Finance (DeFi)? It is a rapidly growing blockchain-based movement that offers benefits such as transparency, security, efficiency, and immutability, and is steadily on track to augment traditional financial systems and services. A number of fin-tech organisations are starting to integrate blockchain technology into their existing apps and programs, however, there is still a learning curve to overcome as many users navigate their way through the new world of DeFi technology.
In considering DeFi, many users carry assumptions over from their knowledge of traditional, centralised finance (CeFi) applications, which proves to be unhelpful when trying to understand DeFi technology. An example would be in DeFi, funds are held in crypto wallets, as opposed to banks. Users are in full control of their assets and entirely responsible for all transactions and the security of their funds. In DeFi, there are no centralised middlemen to assist users, which can prove to be hugely beneficial if these following costly mistakes are avoided:
1. Rushing into the blockchain and crypto/DeFi space with little knowledge
DeFi systems differ significantly from conventional fin-tech applications. Those with even basic knowledge of this space still often make common mistakes.
A few of the key differences between DeFi and CeFi are:
· No company, individual, or organisation controls any aspect of the system
· There are no middlemen or administrators
· Transactions are permanent and cannot be retrieved or reversed
· The user always bears full responsibility for their funds
It might be tempting to jump straight into DeFi, however, it’s important to remember that the space is moving fast and it’s important to take the time to familiarise yourself with common applications, including crypto wallets and how exchanges work. It is also just as important to stay up to date with the latest developments and refresh your knowledge periodically.
2. Not understanding the differences between centralised and decentralised exchanges
A decentralised exchange (e.g. Uniswap) allows for direct peer-to-peer cryptocurrency transactions, whereas a centralised exchange (e.g. Coinbase), is controlled by a third party which controls user funds. Both exchanges enable users to trade cryptocurrency, however, they work in different ways.
It is important to remember that funds held on a centralised exchange are more vulnerable to hacking and theft, whereas decentralised exchanges offer more security and algorithmically calculated prices based on supply and demand.
3. Sending crypto funds to the wrong address
It is important to understand that Blockchain transactions are irreversible. Although a bank may be able to return your funds if an error was made, or you were a victim of fraud or theft, all crypto transactions are permanent and irreversible. This means that users must take care and be cautious when sending and receiving tokens.
Some common address-related mistakes users make are:
· Sending tokens to a smart contract address.
· Sending tokens to the wrong exchange deposit account.
· Sending crypto to an address for a different blockchain.
4. Failure to keep private keys and seed phrases safe
DeFi apps and services require a user to hold a private key, which is essentially a long and unique string of characters that provide access to a cryptocurrency address and all of its funds. To understand this better, a private key replaces the standard username and password model that many are familiar with. This key is derived from a randomly generated seed phrase which consists of 12–24 words. Securing the private key or seed phrase is imperative, since this is all that is needed to access funds from an address. There is no way to help users if they accidentally lose their keys or have them stolen.
It is important to keep a copy of your seed phrase offline, preferably written down on paper and stored in a safe place. Keys can also be stored using a dedicated hardware wallet such as Ledger or Trezor.
5. Not paying enough in transaction fees
Blockchain users need to pay fees to miners who spend time to process and record transactions. On the Ethereum network, for example, these are known as gas fees. Before completing a transaction, a user tacks on the gas payment, however, if the payment amount is too low, the transaction may take many hours to complete or can even be rejected. It is important to remember to check https://ethgasstation.info/ for current fee rates before processing your transaction.
6. Not using secure interfaces
There are many scammers out there waiting to trick you by creating fake interfaces and asking you for your private keys. Any time you are using a DeFi app or browser extension, ensure you are interacting with only the authentic version.
The DeFi and Crypto space is exciting and continues to rapidly evolve. However, before you become a part of this movement, ensure you have your bases covered and DYOR (Do your own Research) to protect yourself and your assets.