The DeFi Movement— DeFi Fundamentals & Joining Liquidity Pools on Balancer

Get Started

Install Metamask or another Ethereum-based browser wallet. Metamask keeps your cryptocurrency keys secured, and allows you to maintain control of where your crypto goes. There is no password reset button for crypto wallets, so be thoughtful and responsible when playing with new tech like this. Read the docs, do the practice runs, etc, before putting serious money at risk.

Get ETH. There are many simple services to trade dollars for crypto. I use Coinbase because it’s a good UI. They have somewhat higher fees, but the experience is very good and clear for new entrants. You can also use Wyre integrated in the Metamask plugin. I’ve not used it personally. I chose not to include referral links in this post, but if you would like one then DM me and I’ll send it along. If you use Coinbase, you need to send your ETH to your browser wallet.

Next, swap to a stablecoin. That is, a token where 1 coin = $1 (e.g. DAI, USDC, sUSD). There are many decentralized exchanges that let you swap from some ETH to another coin of your choice. I’m using Balancer as an example. Great UX, great team, great community — trying hard to decentralize finance. Enable your wallet (Metamask in my case) on Balancer, and the Balancer protocol will “see” your ETH balance available in Metamask. Now you decide how much ETH you want to turn into another coin.

How much? One sec, we need to know where it’s going first.

The point of all this is to deposit coins into a pool. Pools, or liquidity pools, are funds deposited by users to facilitate trades. If someone wants to trade ETH for BAL, a number of liquidity providers have put up both ETH and BAL into a pool. When the person makes the swap, the funds in the pool are used. ETH goes in, and BAL comes out. There are fees on every transaction, so pool providers are compensated, AND in many cases there are additional token incentives for supplying liquidity.

Here’s a screenshot of available pools at the time of writing.

Available Pools on Balancer

When you swap your ETH, you need to get the tokens that your pool contains, and you need to leave enough ETH to pay for the network transaction fees. Let’s say I want to go into the 50% sUSD — 50% USDC pool. I have 1 ETH, which at time of writing is about $220. I would convert $100 worth to sUSD, and $100 worth to USDC, and leave the spare $20 in ETH to facilitate the transactions. The ETH will be used to pay for network fees.

You can check all these balances in your Metamask or other wallet, and it sometimes takes a few minutes for the transactions to complete. So you do need to wait a bit once you’ve gone through the swaps.

Finally, you can Add Liquidity.

Adding liquidity is available on most decentralized exchanges and DeFi platforms. Familiarize yourself with the UX before making hasty decisions, but once ready, deposit the funds into the pool. If you want, you can withdraw them immediately. All it costs is the network transaction fee. Fees ensure the blockchain network isn’t too spammed and clogged, so good transactions can go through.

When you add liquidity, pools that reward BAL will automatically distribute to the wallet used to deposit funds. Some platforms require the user to withdraw the rewards manually, Balancer at this time does not. The reward in BAL is proportionate to the amount put into the pool. You’ll also earn fees from trades that people make in the pool, but the return on those are not significant until substantial money is deposited.

There are a few great lists of pools that give BAL tokens, but as this is a basic intro, this post will end here. Get your ETH and browser wallet set up, and get comfortable with how crypto moves first.

If you are new to DeFi, find me or other DeFi helpers on Twitter, and start participating in the conversation and action in DeFi for yourself when you’re ready to go down the rabbit hole.

Andy on Twitter — The author

DeFi Dad on Twitter — Great DeFi instructional content

The Defiant on Twitter — DeFi’s best newsletter

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Czym jest DeFi? Compound, MakerDAO, Syntherix, Lightning Network

Are Compound DeFi users riskier since COMP rewards?