DeFi, short for Decentralized Finance, is one of the fastest-growing areas in the cryptocurrency industry in recent years. Unlike traditional financial systems, DeFi primarily relies on blockchain technology and smart contracts, allowing users to participate in lending, trading, staking, liquidity mining, and other financial activities without going through traditional banks or financial institutions.
For beginners who are new to cryptocurrency, DeFi can involve many unfamiliar concepts, including wallets, smart contracts, gas fees, liquidity pools, and more. So, how can beginners get started with DeFi? What do you need to prepare before participating in DeFi? What risks should you be aware of? This guide will introduce the basics of DeFi and explain the fundamental steps beginners can take to get started.
1. What Is DeFi?
DeFi stands for Decentralized Finance. In simple terms, DeFi aims to provide financial services similar to those offered by traditional financial institutions through blockchain technology, smart contracts, and decentralized applications (DApps).
Traditional financial systems typically rely on banks, brokers, or other financial institutions as intermediaries. DeFi applications, on the other hand, primarily use smart contracts to automatically execute predefined rules. Users can connect directly to blockchain networks and related DApps and interact with them according to the rules defined by smart contracts.
The main applications within the DeFi ecosystem currently include:
1. Decentralized Trading
Decentralized exchanges (DEXs) allow users to swap tokens directly through blockchain wallets without having to store their assets on a centralized trading platform for extended periods.
2. DeFi Lending
Users can deposit digital assets into lending protocols to provide liquidity for other users and earn returns according to the rules of the protocol. Eligible users can also borrow assets by providing collateral.
3. Staking
Some blockchain networks and DeFi protocols allow users to lock or stake digital assets to support network operations or protocol mechanisms and receive corresponding rewards.
4. Liquidity Mining
Users can provide liquidity to DeFi protocols and become liquidity providers (LPs), earning trading fees or other rewards according to the rules of the protocol.
5. Yield Aggregation
Some DeFi protocols help users allocate funds across different yield strategies to improve capital efficiency. However, these strategies may involve more complex smart contract and market risks.
2. What Do Beginners Need to Participate in DeFi?
Before participating in DeFi, beginners typically need to prepare the following basic requirements.
1. Prepare Digital Assets
Participating in DeFi usually requires certain cryptocurrencies, such as the native token of a blockchain network to pay gas fees, as well as other tokens used for trading, staking, or providing liquidity.
Beginners can first purchase the required assets through a centralized cryptocurrency exchange and then transfer them to an on-chain wallet according to their needs.
2. Set Up an On-Chain Wallet
DeFi generally requires a non-custodial wallet to connect with DApps. Unlike accounts on centralized exchanges, users are responsible for managing the private keys or seed phrases of non-custodial wallets.
Therefore, beginners should always remember:
- Never share your seed phrase or private key with anyone
- Do not click on suspicious or unfamiliar links
- Do not take screenshots of your seed phrase or store them in cloud services
- Carefully verify the website domain before connecting your wallet to a DApp
- Conduct a small test transaction before making large transactions
If your wallet's private key or seed phrase is compromised, your assets may be at risk of theft.
3. Understand Gas Fees
Transactions on blockchain networks usually require network fees, commonly known as gas fees. The fees can vary significantly between different blockchain networks.
Therefore, before participating in DeFi, beginners should understand the gas fee mechanism of the network they are using and ensure that their wallet contains enough of the network's native token to pay transaction fees.
3. How Can Beginners Participate in DeFi?
For users who are new to DeFi, the following steps can provide a gradual starting point.
Step 1: Learn the Basics of DeFi
Before investing any funds, beginners should first understand basic DeFi concepts, including wallets, private keys, smart contracts, gas fees, DEXs, liquidity pools, and slippage.
Do not immediately invest in a project simply because it offers high returns. Understanding how a project works is an important prerequisite for managing risk.
Step 2: Choose the Right Blockchain Network
Different DeFi protocols may be deployed on different blockchain networks, such as Ethereum, BNB Chain, and Solana.
When choosing a network, beginners can consider the following factors:
- Network fees
- Transaction speed
- Size of the DeFi ecosystem
- Number of protocols
- Wallet compatibility
- Security and historical track record
For beginners, it is generally not recommended to participate in multiple networks at the same time, as this can make the overall process more complicated.
Step 3: Create and Set Up a Wallet
After choosing a suitable non-custodial wallet, follow the wallet's official instructions to create an account and securely store your seed phrase.
Beginners may consider separating their DeFi wallet from their wallets used for everyday assets. For larger amounts of funds, a hardware wallet may provide an additional layer of security.
Step 4: Purchase and Transfer Digital Assets
If you do not yet own digital assets, you can purchase the required tokens through a compliant centralized cryptocurrency exchange.
For example, HiBT users can trade digital assets based on the markets supported by the platform. Before transferring assets to an on-chain wallet, users should confirm:
- Whether the withdrawal network is correct
- Whether the wallet address is correct
- Whether the destination network supports the asset
- Whether sufficient funds should be reserved for gas fees
It is especially important to note that wallet addresses on different networks may look similar, but assets cannot necessarily be transferred directly between different networks.
Step 5: Connect to a DeFi Protocol
Once your wallet and assets are ready, you can visit the official website of the DeFi protocol you want to use and connect your wallet.
When connecting your wallet, carefully verify that the website is legitimate. It is recommended to obtain DApp links through official project channels rather than clicking links shared through social media, unfamiliar groups, or private messages.
Step 6: Start with a Small Amount of Funds
For DeFi beginners, it is recommended to start with a small amount of money when performing your first transactions.
For example, you can begin with a small token swap to become familiar with wallet connections, transaction confirmations, gas fees, and on-chain transaction records.
Once you are comfortable with the overall process, you can gradually increase the amount of capital you use.
4. Which DeFi Activities Are Suitable for Beginners?
There are many types of DeFi projects, and beginners do not necessarily need to start with high-risk strategies.
1. Token Swaps
Performing simple token swaps through a DEX is one of the most common ways users are introduced to DeFi.
Users can connect their wallets, select the tokens they want to swap, and confirm the transaction. However, it is important to pay attention to slippage, gas fees, and liquidity.
2. Staking
Staking is generally one of the easier DeFi activities for beginners to understand. Users stake eligible assets according to protocol rules and receive rewards based on the protocol's mechanisms.
However, staking does not mean there is no risk. Users still need to understand lock-up periods, sources of returns, asset price volatility, and smart contract risks.
3. DeFi Lending
DeFi lending generally involves two roles: depositors and borrowers.
Beginners should first understand how lending protocols calculate interest rates, collateral ratios, and liquidation prices before deciding whether to participate.
If you borrow against collateral, it is especially important to monitor market price movements. When the collateral ratio reaches the liquidation threshold defined by the protocol, your assets may be liquidated.
4. Providing Liquidity
Providing assets to a liquidity pool may generate fee income or other incentives, but it can also expose users to impermanent loss, token price volatility, and smart contract risks.
Therefore, liquidity mining should not be viewed as a guaranteed way to earn stable returns. Beginners should fully understand both the source of potential returns and the associated risks.
5. What Risks Should Beginners Consider When Participating in DeFi?
Although DeFi provides new ways to access financial applications, it does not mean that returns come without risk.
1. Smart Contract Risk
DeFi protocols rely on smart contracts to operate. If a smart contract contains vulnerabilities or a protocol is attacked, users may suffer financial losses.
When choosing a DeFi protocol, users can consider factors such as how long the project has been operating, whether its code has been audited, its historical security record, and the level of community activity.
2. Token Price Volatility
DeFi returns are often calculated in digital assets. If the price of the relevant token falls significantly, the value of your assets in U.S. dollars or other fiat currencies may decline even if you receive additional token rewards.
3. Impermanent Loss
When participating in a liquidity pool, significant price changes between the two assets in the pool may result in impermanent loss for liquidity providers.
Therefore, beginners should understand how impermanent loss works and its potential impact before providing liquidity.
4. Liquidation Risk
Some DeFi lending protocols require users to provide collateral. If the price of the collateral falls rapidly, the liquidation mechanism may be triggered.
Using leverage or borrowing at a high collateral utilization ratio can further increase risk.
5. Network and Gas Fee Risks
When a blockchain network becomes congested, gas fees may increase significantly. If users do not have enough funds to cover network fees, transactions may fail to execute successfully.
6. Phishing and Scam Risks
The DeFi ecosystem contains many phishing websites and malicious DApps. Attackers may use fake websites, impersonated official accounts, or fraudulent airdrop links to trick users into granting permissions or signing malicious transactions.
Beginners should maintain a high level of security awareness and verify official channels and website domains before taking any action.
6. Fund Management Tips for DeFi Beginners
For users participating in DeFi for the first time, one of the most important principles is to never invest more money than they can afford to lose.
Consider the following approaches to managing your funds:
First, divide your capital into trading funds, long-term holdings, and DeFi experimental funds rather than concentrating all your assets in a single protocol.
Second, use a small amount of capital when trying a new protocol for the first time. Become familiar with its operations and risks before increasing your investment.
Third, do not choose projects solely based on their APY or APR. Extremely high yields often indicate higher risks and may even be driven by unsustainable incentive mechanisms.
Finally, regularly review your wallet approvals. If you no longer use a particular DeFi protocol, consider revoking unnecessary token approvals to reduce potential risks.
7. What Is the Difference Between DeFi and Centralized Exchanges?
DeFi and centralized exchanges (CEXs) each have their own characteristics.
Centralized exchanges typically handle trade matching, account management, and certain aspects of asset custody. They generally provide a simpler user experience and may be suitable for users who are new to digital asset trading.
DeFi relies more heavily on blockchain technology and smart contracts. Users can manage their own assets directly and participate in on-chain financial applications. However, they also need to take responsibility for wallet management, private key security, and smart contract risks.
For beginners, it may be helpful to first learn the basics of digital asset trading through a centralized exchange and then gradually learn about wallets and on-chain transactions. After gaining a sufficient understanding of the risks, users can decide whether to participate in DeFi based on their individual needs.
8. Common Mistakes Beginners Make When Participating in DeFi
Mistake 1: Assuming High Yields Mean High Profits
The APR or APY displayed by a DeFi project does not guarantee that users will ultimately receive the same level of returns. Token price declines, impermanent loss, fees, and protocol risks can all affect actual returns.
Mistake 2: Assuming an Audited Protocol Is Completely Safe
Smart contract audits can help identify certain code vulnerabilities, but they cannot guarantee that a protocol will never experience a security incident.
Mistake 3: Assuming Popular Projects Have No Risks
Even well-known DeFi protocols may face market risks, smart contract risks, and network-related risks.
Mistake 4: Assuming All Wallet Approvals Can Remain Active Permanently
Keeping unnecessary token approvals active for an extended period may increase potential risks. Users should regularly review and manage their wallet approvals.
Mistake 5: Investing Immediately After Seeing High Yields
One of the most common mistakes beginners make is chasing high returns. Before participating in any DeFi project, users should understand the source of the returns, how funds are used, the risk mechanisms involved, and how they can exit the position.
9. A Recommended DeFi Learning Path for Beginners
If you are completely new to DeFi, you can follow the learning path below:
Stage 1: Learn the basic concepts of blockchain, digital assets, and smart contracts.
Stage 2: Learn how to use a non-custodial wallet and master basic operations such as sending, receiving, and paying gas fees.
Stage 3: Try small on-chain token swaps and become familiar with the basic process of using a DEX.
Stage 4: Learn about DeFi applications such as staking, lending, and liquidity pools.
Stage 5: Study smart contract risks, impermanent loss, liquidation mechanisms, and yield calculations.
Stage 6: After gaining a sufficient understanding of the risks, choose appropriate DeFi strategies based on your own risk tolerance.
10. Conclusion: How Can Beginners Participate in DeFi Safely?
For beginners, participating in DeFi does not require pursuing complex strategies from the beginning. More importantly, users should develop a strong understanding of risk and gradually learn the fundamentals of wallet management, on-chain transactions, and smart contracts.
In simple terms, beginners can follow the principle of "learn first, practice gradually, start small, and manage risk."
If you have not yet explored digital asset trading, you can first learn the basics of using a centralized cryptocurrency exchange and then gradually explore on-chain wallets and DeFi applications. Regardless of which approach you choose, it is important to fully understand how the relevant products and protocols work and not overlook potential risks simply because of the promise of short-term high returns.
DeFi provides users with more opportunities to participate in the digital financial ecosystem, but it also requires users to take greater responsibility for managing their own assets. Only by fully understanding the risks can users explore the DeFi ecosystem in a more informed and responsible way.