Shrouded by widespread uncertainty and volatility, cryptocurrencies have built an unenviable reputation for themselves in the world of finance. But amidst this atmosphere of fear, uncertainty, and doubt (FUD), crypto technology and its international audience have continued to grow silently in the background. These developments have gotten the mainstream financial world to take note, as evidenced by the scramble among financial goliaths like BlackRock and Fidelity to start their own Bitcoin and Ethereum investment funds.
Despite these advancements, ambiguity in an area as sensitive as finance continues to turn users away from understanding the inner workings of DeFi and its underlying blockchain technology. But freelancers and self-employed individuals who are often encouraged to keep their eggs in several different baskets may be denying themselves a potential golden hen by neglecting DeFi.
If you’re looking to expand your financial horizons by looking into DeFi as an alternative income stream, sit tight as we walk you through how crypto wallets operate so that you can decide if this technology is suitable for you.
How can freelancers benefit from participating in DeFi?
Financial inclusivity through smart contracts
DeFi encourages financial inclusivity by giving users true control over their financial assets. This is achieved by having all peer-to-peer transactions take place on decentralised applications (dApps) and facilitated by smart contracts. For the uninitiated, smart contracts are blockchain programs engineered to execute commands according to predefined conditions; lots of smart contracts bundled together creates a dApp. Examples of common DeFi services include the borrowing, lending, and trading of financial derivatives like options and futures. If you don’t have access to traditional financial services, DeFi is a suitable alternative. Its lack of intermediaries and permissionless nature allow anyone and everyone to transact via dApps, regardless of social or financial status.
Permissionless participation
Permissionless-ness, as mentioned above, is another core feature of DeFi, and refers to the absence of restrictions that may disproportionately advantage certain demographics. For example, traditional financial intermediaries such as banks have the power to reject your loan applications for non-transparent reasons, whether it be income instability or an unconventional employment history. You’ll never know! Judgement and opacity like this doesn’t exist in DeFi circles, because your credit score will be transparently reflected on the blockchain, and solely based on collateral, which refers to the crypto assets you deposit and lock up in exchange for borrowing assets.
Pay less and be paid on time
Now, where do freelancers fit in? Modern global interconnectedness has allowed freelancers to work with people from around the world. However, collecting cross-border payments itself can be frustrating with bank fees, conversion rates, exchange fees, and credit card fees added to the mix. Processing delays can further complicate the process and bring about greater financial uncertainty. But with cryptocurrencies, you really only have to worry about blockchain transaction fees (known as gas fees), which help ensure that people who secure and maintain the network are duly compensated. Otherwise, crypto payments are pretty much instantaneous, fee-free, and straightforward. With the exception of certain older, pioneer networks like Bitcoin and Ethereum, modern blockchain networks are capable of settling transactions in mere seconds for close to zero gas fees. This isn’t just happening in the crypto sphere, either, as Visa itself has laid down their endorsement by becoming one of the first financial institutions to select the Solana blockchain for payment settlement at scale.
Is DeFi a stable investment?
For all its volatility, DeFi can actually be a good hedge against financially unstable periods when demand for freelance work slows to a trickle. Sounds ironic, but hear us out. Borrowing and lending in DeFi has thus far been limited to collateralised lending, where a borrower can only take out a loan equal to ~75% of the collateral they posted. This helps to guard against anonymity and permissionless-ness and allow the lender to recuperate their assets in the event of a default. This may sound unappealing from the outset because you’re locking up your assets to receive less than what they’re worth. However, it can actually work in your favour during periods of economic growth, with major and more stable crypto assets.
ETH (native token of the Ethereum blockchain) is a great example of this. Let’s assume 1 ETH is worth $100. If you post 10 ETH or $1000 as collateral, you get $750 worth of a USD-pegged stablecoin ie. DAI. Assuming you’re confident that $ETH will appreciate, you could use your $750 of DAI to purchase the equivalent in ETH, netting you a total of 17.5 ETH. If ETH appreciates by $10, your assets are now worth (17.5 * $110) = $1925. Returning your debt of $750, your assets are now worth ($1925 - $750) = $1175. Had you simply let that 10 ETH appreciate in your wallet untouched, your assets would be worth (10 * $110) = $1100. You would have earned $75 by borrowing to purchase more ETH!
Of course, profit will always be proportional to the amount of capital invested. If asset speculation isn’t your cup of tea, DeFi borrowing still allows you to convert your crypto assets to cash without having to sell them. This might be useful in situations where you’re strapped for cash and need a sum to tide you over until you receive your next payment.
How do crypto wallets work?
But how does one even begin to participate in DeFi? Let’s start by discussing how crypto wallets actually work. A common misconception is that crypto wallets store crypto assets, but this is simply not true. Blockchains store crypto assets. Wallets, on the other hand, connect you to the blockchains for asset access and manipulation.
What’s actually being stored in crypto wallets are private keys. Together with public keys, these come together to form an encryption system known as the public-key cryptography, without which cryptocurrencies wouldn’t exist. A public key allows you to receive transactions, but only its associated private key can prove that you own the contents within said transaction. Public keys are normally shortened to wallet addresses, which take the form of long strings of numbers and letters that look something like 0x46…1ca6 (truncated). Wallet addresses are often freely shared and publicly visible, because they mean nothing without their associated private keys. Private keys are long strings of binary digits but are normally encoded into 12–24 word long mnemonics or seed phrases, which are used for signing into a wallet and recovering it from a different device. For this reason, private keys should always remain strictly confidential.
Hot vs Cold Wallets
Next, let’s move on to wallet types. The first important distinction lies between hot and cold wallets. Hot wallets are hot because they’re connected to the Internet, making them relatively less secure and more risky, but convenient and user-friendly. They’re safeguarded by the aforementioned mnemonics/seed phrases, which are generated just once during your wallet’s creation and never again. It’s recommended to store these seed phrases in writing instead of keeping them in an online format (like a notes application) to minimise the risk of exploitation. Cold wallets are also referred to as hardware wallets, and as their names suggest, are completely offline and therefore less risky. However, these can cost anywhere between $50–$100 for a quality device.
Custodial vs non-custodial Wallets
The second important distinction lies between custodial and non-custodial wallets. The term custody here refers to how much control you have over your wallet. Custodial wallets are controlled by the entity that owns them, such as centralised exchanges (CEXs, more on them later) which act as brokerages or stock exchanges in the crypto realm. Just like their traditional finance (TradFi) counterparts, CEXs like Binance and Coinbase control your crypto assets via their platform wallets. While these methods of storage are safer, they are not truly in your control, which somewhat contradicts the ‘decentralised’ aspect of DeFi, but isn’t necessarily a bad thing in itself.
Non-custodial wallets are the exact opposite, giving you full control of your assets and nobody else. Cold wallets are non-custodial by nature because only their physical owner can use it. That said, there is considerable risk in using a physical device to safeguard large chunks of crypto assets that can be lost without careful management. Ultimately, the question of choosing between custodial and non-custodial wallets boils down to how comfortable you are with institutional control.
Now that we know about the types of wallets, let’s explore some of the most popular crypto wallets being used today:
- MetaMask is by far the most functional and widely used non-custodial hot wallet, reportedly having 21 million users in 2021 and currently serving over 30 million.
- Exodus and Trust hot wallets trail behind in terms of user count but are favoured by portions of the community for traits like user-friendliness and aesthetics.
- Custodial hot wallets are wallets controlled by CEXs, the most reputed and reliable of which are Binance, Coinbase, and Kraken, although there are many other smaller-scale exchanges that are similarly dependable.
As for cold wallets, many communities favour Trezor because of its quality and open-source nature. Ledger is a popular alternative, although it’s not open-source.
Where can I buy DeFi assets using my crypto wallet?
Whew, that was a lot of information! Now that you’re familiar with wallets and how to operate them, you’ll need to know where to actually buy crypto assets. CEXs are one option. Platforms like Binance will be familiar to anyone who’s used a brokerage or bought stocks on an exchange. The only difference here is that you’re buying cryptocurrencies instead. Your other option is decentralised exchanges (DEXs), which facilitate peer-to-peer crypto trading using smart contracts. The most popular kind of DEX is called an automated market maker (AMM). AMMs hold liquidity pools, which are essentially groups of two or more crypto assets. An algorithm automatically adjusts the prices of assets in the pools depending on demand from users and the supply of liquidity. Some noteworthy DEXs are Uniswap and PancakeSwap, but there are many others that provide different benefits or more attractive yields on certain assets.
In trading cryptocurrencies, you’ll come to realise that some tokens, like ETH, have different versions, like wETH (wrapped ETH), stETH (staked ETH), or even wstETH (wrapped staked ETH)! Don’t be intimidated—these are simply slightly altered versions of the original tokens that have specific uses. The ETH token was created a long time before most of today’s tokens, so it’s unable to interact with modern tokens. wETH is wrapped ETH, which is basically a modified ETH token that’s able to interact with modern tokens. stETH is a token from the crypto protocol Lido, which acts as a replacement token for ETH that is staked on their platform. To stake a token is to deposit it in order to gain returns over time, but that’s a topic for another day.
Explore DeFi safely with Freelancer Nation
The world of DeFi and crypto is very new and developing swiftly. New concepts will be appearing all the time, all while the pressure to deal with older concepts continues to mount. We understand how daunting this can be, which is why we set up the Freelancer Nation network to help guide you through new opportunities in this rapidly developing realm.
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