Decentralized finance (DeFi for short) has become a major part of the cryptocurrency landscape, allowing users to access financial services without relying on traditional banking or other centralized organizations. 

DeFi lending is one of this space's most popular and rapidly growing components, enabling people to lend their digital assets directly to borrowers in exchange for interest payments. In this guide, we’ll take a look at how DeFi lending works and what you need to know before getting started.

Please note, none of the content in this post is financial advice but is instead educational material with fictional examples.

How the Wealthy Stay Wealthy

Buy Borrow Die is a financial strategy that involves purchasing assets with borrowed money and then holding onto them until death. This strategy has gained popularity due to the low-interest rates that have made borrowing money more accessible and affordable. 

Many proponents of Buy Borrow Die argue that it is a way to create wealth by using leverage and taking advantage of inflation. 

However, critics warn that this strategy can be risky and could lead to debt and financial instability. Despite the controversy surrounding it, Buy Borrow Die remains an intriguing concept in the financial world that continues to be debated and studied.

How Does It Apply to Crypto?

Selling crypto for profit, yield farming, and several other scenarios create taxable events in most countries. One of the best ways to avoid these occurrences is to deploy a Buy Borrow Die strategy to take profits.

For example, you bought BTC in 2012. You purchased 100 BTC back then at $12 a token. It was a little pricey, but hey…you never know what will happen, right?

Even in the middle of the nastiest bear market in crypto history, that 100 BTC is worth $2.7 million at current pricing. If you were to sell it, you would face a monstrous bill from your local tax authority.

Borrowing could be the right play if you want some funds. You can move your BTC to a lending protocol, borrow against it at a relatively safe LTV ratio, and do some different things. 

You could withdraw all of it and spend it however you choose. Keep in mind you still have a loan to pay back. So a wise strategy could be something like this:

1. You borrow at 25% LTV, which would be $675,000.

2. Take half and go have a nice time.

3. Take the other half and farm stablecoins. 

You will probably earn around 5% interest and can use that to pay back your loan at your convenience. DeFi lending doesn’t work the same as TradFi.

There are no monthly payments. And there is no reporting to the credit bureaus if you don’t pay for a month. 

The best part? You keep your 100 BTC.

What is DeFi Lending?

Defi lending is a form of lending that allows users to lend and borrow cryptocurrencies without the need for intermediaries such as banks or financial institutions.

It offers a more efficient, transparent, and cost-effective alternative to conventional lending methods by eliminating intermediaries. 

Using smart contracts and blockchain technology, users can participate in defi lending by depositing their crypto assets into a pool, which are then lent out to borrowers. 

In return, lenders earn interest on their deposited assets, while borrowers get access to funds at significantly lower interest rates compared to traditional lending methods. Defi lending is a game-changing innovation set to revolutionize how people access credit and invest their assets.

Benefits of DeFi Lending

DeFi lending offers a number of benefits for both borrowers and lenders. The main advantage for borrowers is access to funds at lower interest rates than traditional credit products. Some protocols may even pay you to borrow using their platform, which will likely be awarded to you in their token.

This makes it easier and cheaper for them to get the money they need without excessive fees or waiting around for approval processes. 

For lenders, lending allows them to earn passive income and diversify their portfolios with low-risk assets. It also enables them to access global markets, as they can lend to borrowers across the world while still earning interest on their investments. 

Finally, DeFi lending gives users greater control over their funds, as all transactions are done using smart contracts and blockchain technology. This ensures that users have complete autonomy over their funds and can access them at any time.

Drawbacks of DeFi Lending

Despite the numerous benefits, there are some risks associated with this product. 

For example, since it is a new technology, there is no guarantee that all platforms or protocols will be reliable and secure. This means that users should always do their research and make sure to only use reputable projects before getting started. 

Aave is the most popular DeFi lending platform and has been forked several times. Some of these forks weren’t successful, and some of them were outright rugs.

Additionally, since the cryptocurrency market is known for its volatility, it can be difficult to accurately predict how much money a lender will make from their investments due to fluctuating prices. 

DeFi lending is also subject to smart contract risks, as errors can occur when code is deployed to the blockchain. As such, users should always be sure to double-check their contracts and never sign anything without fully understanding the implications.

But for most users, the biggest drawback is the dreaded liquidation.

Liquidations Explained

Extreme volatility can lead to liquidation. It's a word that can strike fear into the hearts of investors, but understanding what it means and how it works can give you a sense of control and confidence in your investments. 

Essentially, liquidation occurs when the value of a collateral asset falls so low that it can no longer support the amount of borrowed funds against it. 

When this happens, the system automatically liquidates the collateral, selling it off to repay the loan and avoid losses for the lender. It's a mechanism that helps keep the defi ecosystem stable and trustworthy and something every crypto investor should understand. So if you want to dive deeper into the world of crypto and defi, take some time to learn about liquidations and how they work.

While not every protocol uses Aave’s system, it is the most popular, and most forks out there use it. Here are some examples straight from their docs:

“Example 1 Bob deposits 10 ETH and borrows 5 ETH worth of DAI. If Bob’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of DAI. In return, the liquidator can claim a single collateral which is ETH (5% bonus). The liquidator claims 2.5 + 0.125 ETH for repaying 2.5 ETH worth of DAI.

Example 2 Bob deposits 5 ETH and 4 ETH worth of YFI, and borrows 5 ETH worth of DAI If Bob’s Health Factor drops below 1 his loan will be eligible for liquidation. A liquidator can repay up to 50% of a single borrowed amount = 2.5 ETH worth of DAI. In return, the liquidator can claim a single collateral, as the liquidation bonus is higher for YFI (15%) than ETH (5%) the liquidator chooses to claim YFI. The liquidator claims 2.5 + 0.375 ETH worth of YFI for repaying 2.5 ETH worth of DAI.”

But can we break it down into ELI 5 terminology? We can try, but keep in mind this will be incredibly oversimplified.

You have one ETH. You borrow against it at a 70% LTV ratio (Don’t ever do this, it’s just an example). Let’s say the ETH has a current valuation of $3,000. News hits that something catastrophic is about to happen or is happening. The FUD hits the market, and ETH dives all the way down to $1,500.

Well, you borrowed more than $2,000 in stablecoins against your ETH. The protocol is now in trouble and on the verge of being stuck with bad debt, so they offer up your position to a liquidator, who agrees to pay back a portion in exchange for a fee.

Do you lose everything? No. At least, not all the time. The best case scenario is you’ll get back some of your funds and have a nice new haircut to show off to your degen friends.

How Does DeFi Lending Work?

At its core, DeFi lending works by connecting borrowers and lenders with a decentralized platform. Borrowers must deposit their collateral assets into the platform as security before taking out loans. 

Once this is done, lenders can assess loan requests and decide which ones they want to fund based on the amount of risk involved. 

Once approved, the loan is recorded on the blockchain and distributed to those who funded it. 

The borrower can then access their funds while repaying their loan over time with interest. 

Meanwhile, lenders will receive the repaid principal plus any interest earned in exchange for providing the loan capital. All of this happens fully decentralized, allowing users to gain access to funds quickly and securely.

Types of DeFi Lending Platforms

DeFi lending platforms come in all shapes and sizes. Some popular platforms, such as Compound and AAVE, offer users a wide range of services, including margin trading, stablecoins, decentralized exchanges (DEX), cryptocurrency-backed loans, and more. 

Other platforms like MakerDAO specialize in offering crypto-collateralized loans. Each protocol has its own set of features, so it’s essential to do your research before deciding which one best fits your needs.

Conclusion

DeFi lending is a powerful and revolutionary way to access credit, invest assets and earn passive income. It offers easy access to funds at competitive rates while allowing lenders to diversify their portfolios in global markets. 

With its smart contract technology, DeFi lending also gives users complete autonomy over their funds. However, users need to understand the risks associated with this new technology before getting started by researching platforms and double-checking contracts. 

Whether you’re a borrower or lender looking for an alternative financial solution, DeFi Lending could be just what you need!

Citations

Aave docs

Buy Borrow Die

Introduction to Sandwich Attacks in DeFi

Decentralized Finance (DeFi) has experienced exponential growth in recent years. As with any innovative technology, it has its fair share of challenges.

One of these challenges is the so-called sandwich attack. In this article, we'll dive into sandwich attacks in DeFi, how they occur, their impacts, and measures to prevent them.

A brief overview of Defi

Decentralized Finance, or DeFi for short, is a rapidly growing sector in the cryptocurrency and blockchain space.

DeFi is an umbrella term for financial services and applications that operate on decentralized platforms, primarily utilizing Ethereum and its smart contracts.

The core idea behind DeFi is to remove intermediaries, such as banks and other traditional financial institutions, and provide users with direct access to financial services.

Before we delve into what or how a sandwich attack works, we’ll need to understand the fundamentals of DeFi Transactions.

How DeFi Transactions Work

To understand sandwich attacks, you must first grasp how DeFi transactions work. The two main aspects of DeFi transactions are on-chain transactions and smart contracts.

On-chain Transactions

On-chain transactions are those that occur on the blockchain. When you interact with a decentralized application (dApp) or a decentralized exchange (DEX), your transaction is added to the blockchain and executed by miners or validators.

Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code.

They control most DeFi applications and execute transactions based on predefined conditions.

How Sandwich Attacks Occur

Sandwich attacks occur when an attacker manipulates the order of transactions to benefit from the price movement caused by a user's trade. This can be done through front-running and back-running.

Front-Running

Front-running is when an attacker spots a user's transaction in the mempool (the pool of pending transactions) and creates their own transaction with a higher gas price.

This ensures that the attacker's transaction is executed before the user's, allowing them to profit from the price change.

Back-Running

Back-running is when an attacker places a transaction immediately after the user's transaction.

The attacker benefits from the price change caused by the user's trade and sells immediately after, making a profit.

Impacts of Sandwich Attacks

Sandwich attacks have several consequences, including user financial losses and market manipulation.

Financial Losses for Users

Users can suffer significant financial losses due to sandwich attacks.

As attackers manipulate the transaction order, the user pays a higher price for their trade, which translates to financial losses.

Market Manipulation

Sandwich attacks contribute to market manipulation, allowing attackers to influence the price of assets in the short term.

This manipulation undermines the fairness and trust of the DeFi ecosystem.

Examples of Sandwich Attacks in DeFi

There have been several high-profile sandwich attacks in the DeFi space. In one instance, a user lost over $100,000 due to a sandwich attack on the SushiSwap DEX.

In another case, a user lost approximately $50,000 while trading on the Uniswap platform.

Measures to Prevent Sandwich Attacks

There are several ways to mitigate the risk of sandwich attacks in the DeFi ecosystem:

Slippage Tolerance

Users can set a slippage tolerance level in their transactions, which limits the maximum price change they're willing to accept. This can help protect users from severe price manipulation during sandwich attacks.

Gas Price Manipulation

Users can increase their gas prices to ensure their transactions are executed faster.

This makes it more difficult for attackers to front-run their transactions. However, this method could lead to higher transaction costs for users.

Time-locked Transactions

Some platforms offer time-locked transactions, which allow users to set a specific time or block number for their transactions to be executed.

This feature can make it harder for attackers to sandwich the user's transaction.

Decentralized Exchanges with Order Books

Users can opt for decentralized exchanges that utilize order books rather than automated market makers (AMMs).

Order book-based exchanges are less susceptible to sandwich attacks, as they provide more transparency and control over the execution of trades.

Conclusion

Crypto sandwich attacks pose a significant threat to the cryptocurrency ecosystem, exploiting vulnerabilities in the trading process to the advantage of malicious actors.

Understanding how these attacks work and implementing preventive measures is crucial for protecting individual investors and the overall market stability.

The cryptocurrency community can strive towards a more secure and resilient trading environment by staying vigilant and adopting security best practices.

Manage your Cryptocurrency News & Information all in one place

Alphaday is the ultimate crypto dashboard for staying up to date with all things crypto and interacting with your favorite DApps.

It is built on a highly customizable platform that lets you re-create your entire crypto workflow within minutes, so you never have to visit another crypto website ever again.

Our mission is to bring you all the tools needed to follow your favorite projects, stay up-to-date with the latest narratives, and use your favorite dapps, all from the comfort of one easy-to-use customizable dashboard.

People are joining the forthcoming online revolution due to the tremendous enthusiasm surrounding the Web3 world and all the new opportunities it offers. 

Understanding Web3

In fact, the global cryptocurrency market is valued at $870 Billion at the time of this writing, and the global metaverse market is expected to grow at a CAGR of 39.4% from 2022 to 2030.

Crypto, NFT, DeFi, DAO, metaverse, and many others come together to form the world of Web3, a permissionless, decentralized internet whose distinguishing characteristic is ownership. 

Both investors and customers have great opportunities, thanks to Web3.

Freed from centralized control, users can directly collaborate to develop digital ecosystems, earn cryptocurrency tokens, and even enjoy some of the benefits of creating a thriving online world in the decentralized internet of the future.

In today’s article, let’s dive deep into the world of Web3 and see how you can invest in the future. 

Why Invest in Web3?

Investing in Web3 has several potential benefits. First, Web3 is a rapidly growing technology that can potentially disrupt several industries, including finance, healthcare, and supply chain management.

Second, investing in Web3 allows you to participate in the growth of the decentralized web and potentially benefit from the appreciation of Web3 tokens.

How to Invest in Web3

Earn Through Airdrops

Airdrops are when a blockchain project airdrops free tokens to the community. Usually, they do this to spread the word about their initiative and raise awareness.

It can be beneficial if you know how to sell the tokens you receive through an airdrop. Following are some pointers for taking part in airdrops:

• Find trustworthy airdrops: We must accept that the cryptocurrency industry has a lot of fraud, and airdrops are no exception. Always remember to only take part in airdrops from credible projects.

• Join the appropriate Telegram groups: Popular messaging service Telegram is used by several cryptocurrency initiatives. Many groups talk about airdrops, which is a fantastic way to stay informed about recent opportunities.

• Keep calm: Token distribution via airdrops might take weeks or even months. Don't count on using airdrops to become wealthy overnight. You can keep or sell these tokens after receiving them for a profit.

• Keep in mind that you often need to meet certain requirements to qualify for the correct airdrops.

Active and Passive Investing

Purchasing an index or a diversified portfolio already selected for you is what passive investing means. 

On the other hand, active investing is hand-selecting particular stocks or digital assets that you believe will perform better over time.

Although there are a lot of Web3-focused equity indexes, their numbers are gradually growing. 

Metaverse ETFs, such as the Roundhill Ball Metaverse ETF (METV), are also available to Web3 passive investors.

Let's take a look at various passive Web3 investment strategies currently available.

Cryptocurrencies

Cryptocurrencies are adaptable digital assets that can be utilized as a store of value or a means of trade. 

A good approach to generate some passive income and a great strategy to protect against inflation is to invest in cryptocurrencies like Bitcoin, Solana, Ethereum, Litecoin, and others.

However, given how volatile cryptocurrencies are, you should only buy after carefully examining the project or speaking with an investment expert.

Today, you now have a huge selection of crypto tokens and NFTs to choose from, and many are currently available at a discounted price. 

Check out tools like the Alphaday Dashboard, CoinMarketCap, and the Binance Academy to learn about projects and stay up-to-date about crypto.

Crypto Staking

You can lend your tokens on platforms to borrowers who will return them with interest. In addition to diversifying your portfolio, it's a fantastic method to get some passive income.

It is imperative to compare several lending platforms to learn about their advantages and disadvantages before selecting one.

Choosing a crypto financing platform that meets your demands is crucial because they are a relatively new phenomenon.

NFTs

Another excellent option to generate some passive income is by investing in NFTs.

NFTs are digital assets representing everything from virtual real estate to music and art.

Using the AI provided by numerous decentralized applications, you can produce your digital art and convert it into an NFT. You could get some passive cash by selling your NFT.

Additionally, you can purchase NFT stocks. This plan combines classic stock investment with the new NFT trend.

Stay Ahead of the Game with Alphaday

Investing in Web3 can be a complex and ever-changing landscape, and staying up to date on the latest news and developments is crucial.

That's where Alphaday’s trading dashboard comes in - your one-stop-shop for all things crypto!

With over 30+ widgets, news sources, and podcasts, Alphaday provides real-time updates and analysis on the latest trends and events in the cryptocurrency world. And the best part? It's all completely free!

With 500+ projects and 200+ sources of data and information, Alphaday has everything you need right at your fingertips. You'll never miss a beat with the user-friendly platform that keeps you informed and up to date-on all things crypto.

Don't wait to start - join the crypto revolution now with Alphaday. Stay ahead of the game and invest in Web3 with confidence. Follow Arbitrum's crypto news on Alphaday today!

Work in the Web3 Space

One of the best investments you'll ever make in yourself is getting a job or working in this field.

You'll have the chance to gain firsthand knowledge of this fascinating new sector and make a respectable living off it.

The ideal method for you will depend on your qualifications and expertise. There are many ways to find work in the crypto industry.

Here are a few ways:

• Join a startup: Startups are continuously looking for exceptional people to aid in developing their companies. If you have the knowledge and expertise that a startup requires, this can be an excellent choice for you.

• Look for job positions online: There are several websites and forums where startups and companies in the cryptocurrency field post job openings.

• Attend crypto events: Meeting individuals in the sector and learning about new career prospects can be done by attending crypto events.

• You can begin developing your own dApps with Web3 developer platforms. The current training will get you a significant portion of the way there.
  
  Many people with past coding experience who are new to this business are unaware that they have the abilities and expertise necessary to construct dApps. Those with experience can begin creating dApps that benefit the entire community with a little training.

Invest in Decentralized Finance (DeFi)

When deciding how to invest in Web3, DeFi is yet another sector to take into account. Decentralization of finance is the basic tenet of DeFi.

As a result, people should be able to obtain basic financial services directly without going through a centralized operator like a bank or credit institution.

For instance, in the current economy, savers will put their money in a bank account and receive interest.

Interest rates are typically a tiny percentage in most Western nations. In contrast, DeFi platforms give investors a decentralized way to earn an alluring interest rate.

Some good DeFi coins are Colony Lab, Aave, DeFi Swap, and Uniswap. Most of these decentralized networks provide staking services for their native currency, and many yield a yearly interest rate of 75%.

Decentralized trading services are also provided through some of these like DeFi Swap. As a result, investors can instantly exchange one Web3 token for another without having to create an account.

Additionally, projects like DeFi Swap provide a yield-farming platform that will let investors passively profit from liquidity pools.

Simply put, investors will share in any fees received by the DeFi Swap market in exchange for providing liquidity. 

Investors can get a head start on the project in the interim by purchasing tokens from these projects, which are traded on exchanges.

Try "Play to Earn" Games

Numerous Web3 projects incorporate a variety of new games. And many of these projects offer brand-new "play to earn" strategies that enable players to acquire crypto while gaming.

Players can accomplish this by engaging in game-related activities like staking, farming, questing, or just enjoying the game.

Gods Unchained, Axie Infinity, and Splinterlands are some of the most well-known games that use this approach. These games allow players to fully utilize Web3 while having fun and winning digital goodies.

To get a return on their investment, platforms like The Sandbox enable users to monetize assets (like real estate) and game experiences. This is a fun approach for newbies in the web3 space. 

Own a piece of Web3 by Investing in the Metaverse 

Purchasing virtual land inside an already-existing, well-known metaverse project is another choice to consider when deciding how to invest in Web3 crypto. 

For example, initiatives like Decentraland and the Sandbox let users purchase land inside their metaverse universes.

As a result, the investor will have a share in Web3 and possibly the metaverse. The investor will then be able to construct real estate projects on top of the virtual land.

The investor may opt, for instance, to create a virtual hotel and rent out each room to members of the metaverse community. Or, the investor can construct a virtual attraction like a casino or stadium on top of their land.

The sale of metaverse land is already a significant industry in and of itself, although the idea may seem far-fetched.

For instance, it was revealed in late 2021 that an investor had spent more than $4 million to acquire a plot of land in the Sandbox metaverse. In another instance, a Decentraland land piece had been sold for over $2 million.

This demonstrates that land in the metaverse can appreciate as demand rises, just like traditional real estate.

The investor will need to select an appropriate project first to obtain exposure to metaverse land. 

Investing in IoT to Connect 

The Internet of Things, often known as IoT, is another good choice in our list of top Web3 investments. Along with the previously mentioned NFTs, metaverse, and crypto assets, this is another idea that Web3 inventors continue to find appealing. 

In a nutshell, the IoT concept seeks to establish a society in which Web3 connectivity permeates every element of our life.

A smart home is an illustration of this in its present form. Smart homes make use of the Internet of Things idea by guaranteeing that appliances can be managed via a single hub, such as a smartphone device, whether that be running a bath before reaching home or turning on the heating remotely.

IoT will probably coexist with the metaverse universe and keep pushing things to the limit. The Global Internet of Things ETF may be the finest choice to consider if you want to invest in this Web3 sector.

This ETF has a broad selection of securities connected to both the IoT and Web 3.

Skyworks Solutions, Dexcom, Garmin, Ememory Technology, and ADT are a few stocks this ETF holds.

Other Web3 Income Sources

With the use of blockchain, Web3 aims to give regular people the chance to get some compensation for the effort and data they generate every time they access the internet. 

People and producers will be able to profit from the value of the daily work they create in the multiverse of Web 3.0. Here are some more ways you can try to invest and earn in Web3:

Create Your Own Crypto

You can use systems like PRIVI to build custom tokens or cryptocurrencies using the latest Web3 technologies. 

Personal Tokens are a form of private money that users can freely mint and distribute. The value that a user generates immediately affects the currency's worth. 

So, how does it function?

Personal tokens can be given to your social media following or through other networking systems by giving them a monetary value. The content producer can then utilize them to pay for their goods or service.

The value of the personal token rises along with demand as the quality of the content, the audience, and the number of transactions improves. 

The most important factor you need for this is to have highly engaged followers. 

Promote Your Digital Work

With the growth of Web3, opportunities are continuing to present themselves in novel and intriguing ways.

The creative economy will probably take the lead in monetization thanks to NFTs, which enable web users to make money by selling their creations. 

As mentioned above, you can invest in NFTs; however, you can also create and sell your own NFTs. 

Digital art is a type of NFT that can be listed. Now that content is created and sold utilizing decentralized apps, authors and writers can sell and distribute their material as NFTs.

Final Thoughts

Web3 and associated technologies are rapidly developing, opening up a brand-new world of investment opportunities.

If you decide to invest in Web3, there are chances of financial success in the future, but you must also be aware of the risks. 

Like other facets of cryptocurrencies, Web3 is still in its infancy, so always remember to proceed cautiously.

Currently, Web3 allows everyone to invest early in a growing industry backed by top IT talent and awash in venture capital.

NFTs, cryptocurrencies, and direct investments in the Metaverse are good places to start, but keep in mind that they are all speculative.

To acquire as many perspectives on the information as you can, stay up to date with the news and the latest trends, sign up for newsletters, read articles, follow blogs and YouTube channels, and join online forums and communities on Discord, Reddit, Telegram, Facebook, and other social media sites. Find arguments and look for refutations.

Learn about Web3, and more importantly, exercise caution, conduct a comprehensive study, and, as we recommended, only spend money you can afford to lose.

As the crypto market continues to expand and diversify, crypto enthusiasts and traders are introduced to various new words and concepts, and wETH is one of them. 

While Bitcoin and Ethereum dominate the crypto market, wETH is quickly becoming a household name in the world of decentralized virtual currencies. 

WETH was born from the need for seamless interoperability between Ether and ERC-20 tokens which are the two most important components of the cryptocurrency ecosystem. ERC-20 is a token standard that promises flexibility, transparency, and practical outcomes, making it an attractive option for developers of decentralized apps (dApps). 

However, Ether, the native cryptocurrency of Ethereum, is not compatible with ERC-20, making it difficult for traders to exchange Ether for ERC-20 tokens and vice-versa. 

So what’s the solution?

Enter: Wrapped ETH, which solves this problem by bridging the gap between Ether and ERC-20 tokens. 

WETH allows traders to seamlessly exchange Ether for ERC-20 tokens, enabling them to participate in emerging dApps and other decentralized exchanges that support ERC-20 tokens. 

Still, puzzled? No worries. In this article let’s explore the world of Wrapped ETH, how to wrap and unwrap ETH, and its benefits. Let’s dive in. 

What is Wrapped ETH?

wETH is an ERC-20 token that is essentially a representation of ETH, pegged 1:1 with the value of ETH.

This means that while ETH itself may not be compatible with many decentralized finance (DeFi) protocols and applications, wETH can be used as an intermediary to interact with these platforms. 

So, what's the difference between a token and a coin? Coins are digital assets that run on their independent blockchain, while tokens are built on top of existing blockchain infrastructure. 

Coins are typically used as a form of currency or store of value, while tokens can represent anything from loyalty points to digital assets. To help illustrate this, think of the difference between fiat currency (like the US dollar) and a gift card. Both have value and can be used as a form of payment, but they exist on different platforms. Fiat currencies are independent, while gift cards rely on someone else's payment infrastructure and ecosystem. 

In the same way, Bitcoin (BTC) is a coin because it runs on the Bitcoin blockchain and helps validate transactions, while ETH is a coin because it runs on its native Ethereum blockchain. So, when it comes to wrapped ETH, it's simply a token built on the Ethereum blockchain that represents ETH and allows for compatibility with DeFi protocols and other blockchains.

What's the Difference Between WETH and ETH?

WETH, or Wrapped ETH, is an ERC-20 token that serves as a representation of ETH with a 1-to-1 peg.

This means that for every WETH in circulation, an equivalent amount of ETH is locked up in a smart contract. And here's the catch, the locked ETH can only be accessed when the same amount of WETH is returned and converted back to ETH.

In essence, wETH is a derivative of ETH, allowing you to interact with DeFi protocols and applications where ETH can't be used. It's like a gift card to the DeFi world, while ETH is legal tender.

The beauty of WETH is that the 1-to-1 peg between ETH and WETH is maintained through Smart contracts. It's predefined in the smart contract code, ensuring that the redemption price stays at 1-to-1.

Why Wrap ETH? 

Reasons for wrapping Ethereum would also be a key element in a handbook on "how wrapped Ethereum works." 

Beginners might question why they require wrapped ether when they can use ETH on the Ethereum blockchain. The technical distinctions in the way Ethereum tokens are designed are the best approach to comprehending the rationale behind Ethereum's packaging.

The Ethereum network aids developers in establishing new guidelines and standards to support the cryptocurrency industry. For instance, the ERC-721 token standard has been a key aspect of NFT development. In contrast to ERC-20 tokens and ETH, the ERC-721 tokens will function differently.

Even while developers can customize the creation of digital assets, not all dApps can use ETH. Finding ETH uses is crucial given the adoption of dApps for ERC-20 token acceptance in staking and investing applications. 

The seamless interoperability of tokens across the entire blockchain ecosystem is the main advantage of wrapped tokens. Plus, ERC-20 token versions of Ether can be used to add Ether to a liquidity pool or use it as collateral.

How to Wrap Ethereum?

Wrapping ETH on OpenSea 

The OpenSea NFT marketplace offers a reliable and user-friendly platform for converting Ether into WETH. To wrap ETH on OpenSea, you simply need to follow these steps: 

1. Click on the "Wallet" option in the top-right corner of the app. 

2. Select "Wrap" from the options near the Ethereum option.

3. Input the amount of ETH you want to convert. 

4. Click "Wrap ETH" to initiate the smart contract conversion process. 

5. Confirm the transaction through MetaMask. You'll receive a confirmation message and find the wrapped ETH balance in your OpenSea account wallet. 

Wrapping ETH on Uniswap 

Uniswap is another popular platform for wrapping ETH. Here's what you need to do: 

1. Connect your wallet to Uniswap and select the Ethereum network. 

2. Click "Select Token" and choose WETH. 

3. Enter the amount of ETH you want to convert. 

4. Confirm the transaction through your wallet. 

5. Wait for the final confirmation on the blockchain. 

Generating WETH with MetaMask 

MetaMask, a popular crypto wallet, also makes it easy to wrap ETH with a few simple steps: 

1. Choose the "Ethereum Mainnet" option on the MetaMask wallet. 

2. Click on the "Swap to" field and select WETH. 

3. Input the amount of ETH you want to convert. 

4. Review the conversion rate and details. 

5. Confirm the transaction by clicking "Swap." You'll see the WETH balance in your MetaMask wallet after confirmation.

How to unwrap Ethereum?

It is also possible to manually un-wrap eth using a smart contract.

To wrap and unwrap ETH in the same way, use the wETH smart contract on OpenSea. The only change is that the user must choose "Unwrap wETH" rather than "Wrap ETH."

The same is true if you use Uniswap or MetaMask to convert back from wETH to ETH. On both systems, unwrapping ETH follows essentially the same steps that wrapping it did earlier. The only difference should be the values (from wETH to ETH).

Can ETH Be Wrapped On Different Blockchains?

Other wrapped versions of ETH are available on significant blockchains, enhancing ETH's interoperability. 

For instance, using wrapped ETH on the BNB Smart Chain (BSC) enables trading or use of wETH inside the BSC DeFi ecosystem. To accomplish this, you must transfer ETH into your BSC wallet from Binance or another exchange. Before withdrawing, confirm that your exchange enables the conversion from ETH to wETH.

You can also make use of a bridging service. These DApps are third-party programs that take cryptocurrency, store it on the source blockchain, and then create wrapped tokens on the destination blockchain at a 1:1 ratio.

Although bridging tokens frequently works well, moving tokens across blockchains may be risky. Some bridges' smart contracts have occasionally been compromised. Before employing a platform's bridging services to bridge-wrapped Bitcoin, wrapped Ethereum, or another token, do your homework on the platform.

Potential Dangers of Wrapped Ethereum

Vitalik Buterin, the co-creator of Ethereum, has expressed his concerns about the potential dangers of wrapped tokens. He claims that wrapped tokens are vulnerable to centralization and that many of these wrapped assets have major issues with centralization. 

At the moment, wrapping assets cannot be automated on the Ethereum blockchain, so they are typically performed via central programs, raising concerns about potential abuse and manipulation. Wrapped tokens that have already been issued rely on the third-party platforms that issued them, making decisions over wrapped assets susceptible to centralized bodies. 

Why is the Price of wETH the Same as ETH? 

ETH is converted to wETH in a 1:1 ratio to preserve the peg between the two. If wETH were more affordable, individuals would purchase it and sell it for ETH to earn a profit, which would raise the demand for and price of wETH. 

Conversely, if wETH were more expensive, individuals would buy ETH and convert it to WETH to sell, causing the supply of WETH to increase and its price to decrease. These supply and demand fundamentals keep the peg between WETH and ETH largely steady.

In Conclusion

The future of wrapped tokens may look different as advancements in interoperability solutions are made. 

Updating blockchains' codebases to be compatible with one another or using bridge chains are just a few of the solutions on the horizon. For Ethereum, the goal is eventually to phase out the use of wrapped tokens like wETH as the network evolves. 

Despite this, wrapped tokens will continue to play a valuable role in the near future.

They provide a stabilizing force in a decentralized ecosystem and make cross-chain transactions possible. As blockchains become more interoperable, wrapped tokens may become less necessary, but their impact will continue to shape the future of decentralized technology.

This time last year, people said that CeFi was the safest and best way to invest in crypto. Defi is full of rugs, they said. Watch out for pump and dumps. You can’t trust anonymous developers.

Since the Terra Luna debacle, it's come to light that many of the venture capital firms and CeFi businesses that were using this narrative were anything from insolvent to outright fraudulent.

Now, in the heart of a bear market with CeFi companies desperately trying to prove they aren't thieves and liars, DeFi is looking good. Here's how to invest in the space.

Research First

Researching DeFi projects is an essential step for anyone looking to invest in the cryptocurrency space. Not only does it ensure that you are making a well-informed decision about which project to invest in, but it also helps reduce risk and ensure that you don't accidentally invest in a malicious scam.

By taking the time to research any project you plan on investing in, you can benefit from greater security and peace of mind. Doing thorough research will also increase your understanding of various DeFi platforms, allowing you to decide where and when to allocate resources more effectively.

As with any type of investment, proper research should always be done before investing in DeFi projects, and be aware of both the risks and rewards.

How to Research a Defi Project

Researching a DeFi project requires a keen eye and an in-depth understanding of the technology. While it is easy to get caught up in the hype, it's essential to take some time to review the basics - from code principles and product specifications all the way to the amount of liquidity and scalability opportunities.

Users should also consider how long the project has been around, who’s behind it, and how active the community is because these indicators could affect sustainability.

We highly recommend you Read. The. Docs.

This includes the whitepaper as well as any docs on the main website. If you don't have discord, download it. Crypto discord groups are a plethora of information. The project is bad if the community isn't helpful and knowledgeable about the problem the protocol is trying to solve and isn't in the official docs.

Influencers may do an excellent job of bringing awareness to these companies. Still, many of them are shilling businesses they invested in early to pump the price and use their viewers or followers as exit liquidity. So don't take their word for anything.

After doing your due diligence into one or more DeFi opportunities, it's time to put your money where your mouth (research) is.

On-Ramp Your Funds

Opponents of DeFi will often talk about how difficult it is to on and off-ramp money. This couldn't be further from the truth. You can get funds from your bank account into decentralized finance in less than an hour. To put this into perspective, it takes PayPal 1-3 business days to transfer money to your bank account.

Here's what you'll need:

• A hot wallet (MetaMask)

• A cold wallet (Ledger)

• A bank account

• Cefi account (optional)

Step One: Set Up Your Hot Wallet

You must use a hot wallet no matter how you choose to on and off-ramp your money. MetaMask is the most popular, with over a million downloads and easy cold wallet integration.

Setting up Metamask is incredibly simple and involves only a few steps. First, visit the Metamask website, click Get Chrome Extension, or go directly to the extension store for Chrome and search.

Then, download and install the plug-in on Chrome. Once installed, create a password and verify your email address before being prompted to enter some details to back up your wallet securely in case of data loss. Next, select the network you'd like to work with.

ETH (Ethereum) should be selected by default, but more networks can be set depending on the cryptocurrency you want. 

Finally, finish setting up your account by adding a secure phrase that needs to be remembered, as it'll be required for any transactions you make through Metamask in the future.

Note: Many people invest in DeFi because they care about their privacy and anonymity. Infura, the main RPC of the Ethereum network, recently announced they would start collecting data from MetaMask users on their network. It's highly recommended you change your settings.

Once you have your MetaMask set up with all the networks you want to play with, it's time to move some money to DeFi.

Step 2: Move Your Money

There are multiple ways to do this, and they all have their pros and cons. You have options to get your money into DeFi, but at some point, you'll likely have to perform KYC somewhere, whether it be now or later. So expect to have to go through this hassle at least once.

Use a Hardware Wallet

Taking the plunge into the world of cryptocurrency can be both exciting and intimidating. One of the most user-friendly ways to get started with digital currency is to use a Ledger wallet to make purchases.

Setting up a Ledger wallet is relatively simple: after downloading an app that supports purchased crypto coins, you have to add your coins, and you're ready to buy crypto!

All transactions made on a Ledger wallet are secure, meaning your personal finances remain safe throughout your investing journey. Buying crypto with a Ledger wallet opens up a wide array of options for anyone looking to take advantage of the potential growth in value that digital currencies offer.

Once you purchase with your ledger, you can bridge it to any blockchain you want. We highly recommend using a bridge aggregating service like bungee, as bridging assets come with transaction fees, just like making transactions on a single chain.

Here's an example of how the whole process can work: Use a ledger to buy BNB on Binance Smart Chain. BSC has really low transaction fees. While ledger's partnered app will take a cut, you can save money by buying your initial assets on a low-fee chain.

Once you purchase BNB, go to Bungee and bridge those funds to your desired blockchain.

It's that easy, and the whole process shouldn't take more than half an hour.

Transfer from a Cefi Exchange

You must log in to the exchange with your credentials to move funds from a centralized exchange to DeFi. From there, you'll need to withdraw your crypto holdings directly into your DeFi wallet or bridge them through an intermediary wallet service.

The address you enter must be correct; mistakes can mean losing access to one's holdings. It's a good practice to send a "test" transaction first to make sure you put the wallet address in correctly.

After initiating the withdrawal, confirm it on-chain and wait for transaction confirmation before taking the necessary steps within the DeFi platform of choice. Your funds should appear in your MetaMask wallet in just a few minutes, maybe even less.

Here's an example of how it works. You on-ramp money to either binance.us or binance.com, whichever is relevant to you. If this is your first time, there may be a holding period before you can move funds. It depends on the exchange.

However, once the funds are there, you're good to go. Click the withdraw button. Paste in the MetaMask address. Make sure you have BSC selected. And go through the directions as they come up.

Buy Directly Through MetaMask

MetaMask has a few partners that allow you to buy directly through them. While this option has the most anonymity, it also has the highest fees.

All you need to do is log in to your wallet and select which crypto you want to buy. Depending on your location and available partners, you may be limited to just buying ETH.

Once bought, users can move their funds around in DeFi as they see fit.

Best Defi Investments for New Users

Most people start their DeFi journey with decentralized exchanges.

A decentralized exchange (DEX) is an innovative technology that allows users to trade cryptocurrencies or other tokens without entraining their funds to a third-party custodian.

DEXs take advantage of smart contracts and other modern techniques, such as automated market makers, so that members of the DeFi community can make direct trades with one another in real time.

Leveraging blockchain and distributed ledger technology, users have greater access to liquidity and transparency reviews while also enjoying greater security than they would when relying on a centralized asset exchange.

Decentralized exchanges ultimately offer immense potential for DeFi participants who are looking beyond traditional markets and intermediaries for higher levels of autonomy.

Dex communities are a great way to learn the ropes, make some new friends, and learn about new projects. They're also easy to understand, with most of the opportunities revolving around various token pairs and providing liquidity for the pools surrounding these particular pairs.

How Liquidity Pairs Works in Defi

When it comes to DeFi liquidity pools, users need to understand how they work and the concept of liquidity pairs.

In simple terms, a liquidity pair is an asset pair that consists of two different tokens (e.g., ETH/WBTC). When users deposit cryptocurrency into these pools, their assets are put into both sides of the pair, usually at a 50/50 ratio, unless you're using Balancer or a project using that technology, but that's a post for another day.

By doing so, they effectively provide liquidity to the pool and are rewarded with an incentive in the form of a portion of the fees that traders pay when they exchange between these two tokens. Users may also earn rewards from the Dex's farming token, which is paid in an APR.

In this way, liquidity providers act as market makers and can earn rewards while keeping their assets locked up for some time.

Of course, the liquidity pool may be riskier than other options, but it can also provide significant benefits. While there are risks, DeFi has those in abundance, and you need to familiarize yourself with the risk involved, such as impermanent loss and a few other issues that come with liquidity. Despite all of this, it's still the best place to get your feet wet as a new investor.

Some Final Thoughts

Research and ramping funds are just the tips of the DeFi iceberg. The rabbit hole can go as far as you're willing to go.

We recommend buying a cold wallet before you start playing around in this space. MetaMask, while a fantastic product, is hackable, and every day there are stories about people being robbed. A cold wallet is the best way to protect yourself from that threat.

However, even with a Ledger, you're still subject to smart contract risk, hence the emphasis on research before investment. Trust your gut, beware of influencers, and never stop learning about crypto.

Citations:

• Celsus Insolvency

• 3AC Collapse

• FTX Fraud

• Metamask Hack Example

• Smart Contract Risk

• How Ledgers Protect Funds