Introduction to DeFi to BTC Hodlers
Bitcoin is a decentralized, censorship resistant store of value. DeFi, or decentralized finance is a while suite of financial applications all accessible to anyone with an internet connection. All these “DApps” are censorship resistant smart contracts on Ethereum and can work with all sorts of assets – ETH, tokenized BTC, tokenized USD (e.g. USDC, USDT, DAI, etc.) and a host of other assets.
Together, these form a web of interoperable protocols that have capability far beyond what’s possible in traditional finance.
You can use “tokenized BTC” as collateral to enter the DeFi world if you still want to retain BTC exposure. The way to do this is via WBTC or renBTC. More details below. However, note that these tokens have additional counterparty risk than simply holding BTC on the Bitcoin network.
Getting Started
Make sure you have your Bitcoin or fractions of Bitcoin ready to use for your DeFi journey.
The first thing you’ll need to do before you get started in DeFi is to set up your Ethereum wallet, sometimes referred to as a Web3 wallet. Unlike Bitcoin wallets that are primarily used to store BTC, a Web3 wallet does a lot of things for you –
- Store ETH safely in a non-custodial manner so you never have to trust an exchange or third-party to hold your assets.
- Store ETH-based tokens, including ERC20 tokens (fungible tokens), ERC721 tokens (non-fungible tokens), ERC1155 tokens, etc.
- Interact with DApps (Decentralized Applications) on your behalf so that you can use an entire ecosystem of applications in a completely trustless manner, especially the DeFi apps.
For these reasons, MetaMask is by far the most popular Web3 wallet in use today. It is a simple chrome extension which prompts as a popup whenever you try to use a DApp like Compound or Uniswap. You can verify and sign the transaction to interact with the Web3 ecosystem.
MetaMask also supports hardware wallets like Ledger and Trezor. If you have substantial amounts of money, we strongly suggest using a hardware wallet in conjunction with MetaMask.
The steps here are as follows:
- Download and install MetaMask for Chrome or Brave.
- Create a new wallet. Make sure you keep the 12 words secret and secure, and backed up. The 12 words can be used to derive all your private keys used by MetaMask. If you’re using a hardware wallet, this step can be omitted. Instead, connect MetaMask to your hardware wallet.
- Set a strong password.
Enter the Ethereum Ecosystem
If you already have Bitcoin, then there are several ways to enter the Ethereum ecosystem.
Centralized Exchanges
You can start from BTC and trade it for ETH on centralized exchanges. For most people, Coinbase or Binance should be the preferred options for this trade since they are the largest and most trusted exchanges.
If you want higher safety, go with Coinbase. If you want more options, including trading a bunch of DeFi and other tokens, and be able to margin trade, go with Binance. These days, Binance has become the preferred exchange for most serious people and traders in crypto due to all the extra features it offers. More on buying fractions of Ether.
Pros: Cheap
Cons: Lack of privacy, need trusted intermediaries
Decentralized Exchanges
There is current a way to go from BTC to ETH in a fully privacy preserving way so your BTC and ETH addresses do not get associated with each other. This is via the Ren Protocol.
Note that this will cost around 0.1% in initial conversion from BTC to renBTC and another 0.3% or so from renBTC to ETH.
Step-1: Go to Ren bridge and create a BTC deposit.
Step-2: Wait for the transaction to complete.
Step-3: Create the transaction to redeem your renBTC on Ethereum. We suggest allowing an arbitrary time to pass to increase privacy.
Step-4: Go to 1inch and convert renBTC to ETH. Make sure to connect your wallet (via the MetaMask popup) and confirm the transaction that pops up in MetaMask. Note that you may need to do 2 transactions – one approval and one actual exchange.
1inch will automatically split and route your order via all the decentralized exchanges to give you the best price.
As you can see, 1inch is able to create complex routes through the entire DEX ecosystem to bring you the best price.
Step-5 (optional): Use Tornado Cash to enhance privacy. If you want to improve privacy, make sure to deposit the ETH you obtained into Tornado and withdraw it in another address. This is a completely trustless smart contract based mixer (unlike several BTC mixers that have been mostly scams).
However, be aware that the gas price is fairly high to use, so we suggest using this for 10 ETH and above.
At this step, you should have converted your BTC into ETH successfully!
Note: There may be other bridges coming online that convert BTC to ETH in a decentralized or semi-centralized manner. Do your research on how safe these are. When your intention is to immediately convert renBTC to ETH, the bridge is reasonably safe. We don’t recommend holding renBTC since there are additional centralization risks still with Ren.
Pros: Decentralized, privacy preserving.
Cons: Gas costs and other costs add up – expect close to 0.5%-1% depending on how much BTC you start with for the whole process.
Protocols and Tokens
Once you have the ETH in your MetaMask, it is time to go to town playing with DeFi!
The first two primitives we suggest are exchange and borrowing.
For exchange, if you want to buy any tokens, simply go to 1inch to get the best pricing. 1inch will source liquidity from over 20 protocols for you and find the best pricing and order routing. You can also go directly to exchange protocols like Uniswap, Sushiswap, and Balancer.
For a more in-depth guide on exchange, check our guide on buying DeFi tokens without KYC.
You can check out CoinGecko for some of the projects. CoinGecko is usually on top of adding new DeFi and other Ethereum projects.
Then, check out lending. You put in excess collateral and borrow against it. The best place for this is Aave. Another option is Compound.
Some of the DeFi blue chips are AAVE, SNX, LINK, UNI, YFI. You can also simply buy DPI, which is a DeFi index tracking several tokens.
If you’re feeling adventurous, check out some of the yield farms. Yield farming is a way to distribute a project’s tokens widely to users and other value providers. Make sure you thoroughly understand the risks you’re taking including smart contract risks and impermanent loss when you’re being a market maker.
As a first pass on smart contract validation, vfat has a good list of yield farms and a consistent and easy to use interface.
Other Ecosystems
There are other DeFi ecosystems that you can also explore. This is outside the scope of this guide, but you can check out Polkadot, Cosmos, Ava, BSC, etc. There are also primitives on arguably lower quality blockchains like Tron, and EOS as well but we do not recommend them as such.
Along with Ethereum, BSC (Binance Smart Chain) has entered into a thriving ecosystem of DeFi primitives and apps being built. One advantage of BSC is the transactions are far cheaper compared to Ethereum. The biggest disadvantage is its centralization risk. Read more about DeFi and yield farming on BSC if you’re interested.
However, if you’ve only been in BTC all these years, we strongly suggest getting familiar with the DeFi ecosystem on ETH since it is the most established and trusted.
Want us to cover something in greater depth or have any questions on the above? Drop us a comment or email us and we’ll be happy to help.