The popularity of Decentralized Finance (DeFi) has begun to become a large topic of discussion in society with various perspectives involved. Some have used DeFi for investment means, like Yield Farming, which itself has also received great amounts of attention, some have viewed it to be a new method of banking. Nonetheless, investments in DeFi won’t be accomplishable without crypto wallets.
Are crypto wallets important in DeFi?
Decentralized Finance (DeFi) is a financial system that eliminates the need for a central authority, making transaction processing with mediators obsolete. Additionally, the transaction procedures are processed by both the user and the credible system at hand.
When managing DeFi network procedures independently, cryptocurrency wallets are required. Wallets are not related directly with crypto exchanges, but they are rather additional add-ons that protect a user’s private and public keys. At the same time, wallets are also required when connecting to various platforms and applications, especially in the process of transferring funds for DeFi investments.
Personal Crypto Wallets v.s. Wallets on Exchanges
Undoubtedly, many begin their journey into digital asset investments through cryptocurrency exchanges, which have their own built-in wallets that display the user’s currently-owned assets. On these exchanges, users would be able to trade, withdraw, and deposit funds for their transactions, but in reality, these funds may not even be theirs to hold as the exchange would be holding the user’s private key of the built-in wallets, often much like traditional banks or central authorities. Hence the saying; “not your keys, not your coins.”
MetaMask and TrustWallet are both examples of personal wallets which are essential in DeFi and are separate from cryptocurrency exchanges. The aforementioned examples are wallets that can connect to the internet or “hot wallets.” However, hardware wallets can also be used in storing assets and private keys as well. Hardware wallets are personal pragmatic devices that can provide higher security of assets, but would cost the buyer a bit when purchasing the hardware wallet initially.
Personal wallets are required to be taken care of by users themselves, especially as these wallets hold private keys, seed phrases and recovery phrases, which are all key to entering a wallet and the assets they connect to.
Crypto Wallets: Transferring Funds to DeFi
To truly understand the importance of wallets in DeFi investments, the process of transferring funds from exchanges to personal wallets for investments in DeFi must first be elaborated:
1.You must first have coins/tokens. Generally, crypto coins can be bought on crypto exchanges, wherein an account on that platform would be required as well.
2.With coins in your account, a personal wallet can be created outside of the exchange, becoming the destination of transferring coins. These wallets can be used to connect to various platforms or applications to start trading on DeFi networks.
3. With coins or funds in your wallet, you can now connect it to the DeFi platform of interest to start investing.
Investing in DeFi relies on a good understanding of digital assets and blockchain technology in order to apply it to real use and prevent any unfortunate security issues in the future. Wallets can be a stepping stone into the DeFi world, but there is still a plethora of required knowledge investors are advised to have prior to making any investment decisions.