DeFi refers to decentralised platforms that offer financial services via publicly viewable smart contracts.
Most DeFi platforms are based on Ethereum (ETH) and trade in ETH tokens. As ETH itself is not an ETH token it has to be 'wrapped' to be used in DeFi. Wrapping is a process in which an asset is tokenised as an ETH/TRX token. BTC is also wrapped for use in DeFi. They are known as WETH and WBTC respectively.
There are three primary functions that DeFi platforms offer:
1) token swaps - this is an exchange function, swapping one token for another, e.g. USDT -> BAT; PAXG -> WBTC. The trades are made via assets held in liquidity pools (see below) and incur platform fees equivalent to what you would pay on a centralised exchange. You also have to pay gas fees for the transactions, which is not cheap at current and I wouldn't expect it to change any time soon. You also have to be careful (like you would if you were using an exchange) that large orders don't push the price up dramatically. Another consideration is that transactions between less common tokens will likely involve multiple token swaps, which I believe will increase the price of the transaction.
2) liquidity - for token swaps to work requires people to deposit tokens into liquidity pools. In these pools providers must deposit an equal amount (in $ value) of two tokens, e.g. USDT -> WETH. When someone wants to, say, buy WETH with USDT they deposit USDT into a liquidity pool and take WETH from it. Those who have deposited in the pools then get a share of all/most of the exchange fee. This fee is usually paid in the form of the platform's token, but can be in numerous tokens. If you are providing liquidity you will get a daily (seemingly on all platform) interest payment. However you need to be aware that you will loose $ value as the price of your deposited assets change, see. The more volatile the asset prices the higher the interest payment is likely to be, i.e. there are some interest payments that are 100s of percent per year.
3) governance - platforms have their own tokens, which allow you to vote on how the platform operates
Currently all of these functions are somewhat slow and clunky. Using these platforms reminds me of using the internet on a 56kbps modem waiting for 1 hour for an MP3 to download. But it is also a quicker and safer experience to move funds around on DeFi than centralised exchanges. If you just want to swap on a platform you have used before the experience is very quick.
To use DeFi you will need a wallet. I think you can use just MetaMask (a browser plugin), but it is obviously best to use a hardware wallet, but though MetaMask, which will often be the only way you can interface with a DeFi platform. MetaMask also provides better support. Just using Ledger (which few platforms support) is more likely to give you wallet errors.
Most platforms are listed here: https://coinmarketcap.com/yield-farming/
But two other fairly large ones are CREAM and Crypto.com DeFi Swap.
For passive income generation you can provide liquidity as mentioned above. There are also vaults, which typically do not come with the any or little possible losses as mentioned above regarding liquidity (impermanent loss). These vaults are used to perform various income generation strategies as decided by the platform's governance. With vaults you can expect about 10-40% interest per year for stable coins and around 8% for WETH, WBTC. Currently you can earn about $110 per day if you deposit $100,000 TUSD (TrueUSD) at HarvestFinance, i.e. the same amount many want to make from passive income from $1 million. This is paid in the platform's token FARM. So if you want to use it, you'd need to convert it.
In terms of security, I can't say much. The platforms are governed by publicly viewable smart contracts, which provides a vector for exploitation and there would be the possibility of exploitation by the governance. These platforms are also very new. But once there are established platforms they should be quite secure. Many platforms have had their smart contracts audited.
Most DeFi platforms are based on Ethereum (ETH) and trade in ETH tokens. As ETH itself is not an ETH token it has to be 'wrapped' to be used in DeFi. Wrapping is a process in which an asset is tokenised as an ETH/TRX token. BTC is also wrapped for use in DeFi. They are known as WETH and WBTC respectively.
There are three primary functions that DeFi platforms offer:
1) token swaps - this is an exchange function, swapping one token for another, e.g. USDT -> BAT; PAXG -> WBTC. The trades are made via assets held in liquidity pools (see below) and incur platform fees equivalent to what you would pay on a centralised exchange. You also have to pay gas fees for the transactions, which is not cheap at current and I wouldn't expect it to change any time soon. You also have to be careful (like you would if you were using an exchange) that large orders don't push the price up dramatically. Another consideration is that transactions between less common tokens will likely involve multiple token swaps, which I believe will increase the price of the transaction.
2) liquidity - for token swaps to work requires people to deposit tokens into liquidity pools. In these pools providers must deposit an equal amount (in $ value) of two tokens, e.g. USDT -> WETH. When someone wants to, say, buy WETH with USDT they deposit USDT into a liquidity pool and take WETH from it. Those who have deposited in the pools then get a share of all/most of the exchange fee. This fee is usually paid in the form of the platform's token, but can be in numerous tokens. If you are providing liquidity you will get a daily (seemingly on all platform) interest payment. However you need to be aware that you will loose $ value as the price of your deposited assets change, see. The more volatile the asset prices the higher the interest payment is likely to be, i.e. there are some interest payments that are 100s of percent per year.
3) governance - platforms have their own tokens, which allow you to vote on how the platform operates
Currently all of these functions are somewhat slow and clunky. Using these platforms reminds me of using the internet on a 56kbps modem waiting for 1 hour for an MP3 to download. But it is also a quicker and safer experience to move funds around on DeFi than centralised exchanges. If you just want to swap on a platform you have used before the experience is very quick.
To use DeFi you will need a wallet. I think you can use just MetaMask (a browser plugin), but it is obviously best to use a hardware wallet, but though MetaMask, which will often be the only way you can interface with a DeFi platform. MetaMask also provides better support. Just using Ledger (which few platforms support) is more likely to give you wallet errors.
Most platforms are listed here: https://coinmarketcap.com/yield-farming/
But two other fairly large ones are CREAM and Crypto.com DeFi Swap.
For passive income generation you can provide liquidity as mentioned above. There are also vaults, which typically do not come with the any or little possible losses as mentioned above regarding liquidity (impermanent loss). These vaults are used to perform various income generation strategies as decided by the platform's governance. With vaults you can expect about 10-40% interest per year for stable coins and around 8% for WETH, WBTC. Currently you can earn about $110 per day if you deposit $100,000 TUSD (TrueUSD) at HarvestFinance, i.e. the same amount many want to make from passive income from $1 million. This is paid in the platform's token FARM. So if you want to use it, you'd need to convert it.
In terms of security, I can't say much. The platforms are governed by publicly viewable smart contracts, which provides a vector for exploitation and there would be the possibility of exploitation by the governance. These platforms are also very new. But once there are established platforms they should be quite secure. Many platforms have had their smart contracts audited.
