Decentralized finance (DeFi) continues to build momentum as a disruptor of the finance sector. But will it ultimately transform the industry completely?

While this is unlikely in the near term, DeFi – combined with blockchain and distributed ledger technologies – is exposing inefficiencies and costs in existing processes and asking serious questions of traditional centralized finance models.

While some new market entrants tout DeFI as eventually replacing an incumbent financial system weighted against the individual, many banks and other finance institutions are evaluating the opportunities DeFi presents to win consumers willing to embrace new digital-only models and organizations.

So what is DeFi? Put simply, DeFi cuts out the middleman in financial transactions and interactions between two parties – effectively making exchanges, brokers and banks redundant. Smart contracts – contracts that execute on the basis of code that incorporates an agreement between the two parties and reside in a blockchain network – enable these transactions that, as Deloitte notes, occur peer-to-peer or through liquidity pools and automated market matching.

Proponents of DeFi like leading open source blockchain and smart contract provider Ethereum, claim with the new model, markets are “always open”, with no centralized authorities blocking payments or denying access, while previously slow and human error-prone services are automatic and safer, due to being handled by code “anyone can inspect and scrutinize.”

Leading DeFi applications include:

  • Decentralized exchanges that enable secure peer-to-peer cryptocurrency transactions
  • Decentralized lending platforms that provide loans to businesses or the public
  • ‘Wrapped’ bitcoins, or tokens that represent the decentralized digital currency bitcoin on Ethereum and enable bitcoin holders to work with DeFi apps on the network
  • Prediction markets that enable traders to place bets on future events

How to choose a DeFi wallet

The first choice you’ll have to make when deciding which DeFi wallet to use is the blockchain on which you plan to use it. For instance, MetaMask, one of the most popular Web 3 wallets, doesn’t natively support the Solana blockchain.

You’ll have to use a wallet like Solflare, Sollet or Phantom to interact with Solana decentralized applications (dapp). Some blockchain applications require their own wallet: play-to-earn crypto game Axie Infinity requires you to use Ronin Wallet, for instance.

You might end up using several DeFi wallets for different purposes – they’re free and quick to set up. Just remember to store your seed phrase – a 12- or 24-word phrase used to access your wallet – safe.

Read more:8 Best DeFi Coins to Buy in in 2022 and beyond

Beyond blockchains, wallets come with different features. Some wallets are better at supporting certain assets. MetaMask, for instance, doesn’t visualize the NFTs you hold in your wallet. Others, like Rainbow Wallet, allow you to see the NFTs you hold within your account.

Some DeFi wallets are integrated with decentralized finance applications, allowing you to interact with DeFi protocols or perform trades without having to leave the wallet. MetaMask allows you to swap tokens within its app, and SolFlare allows you to manage staking accounts.

Argent allows you to buy funds with debit cards and stake funds at reduced fees – it uses zkSync’s layer 2 network to reduce transaction costs and is integrated with Yearn, Lido and Gro. Coinbase Wallet, the non-custodial wallet produced by the custodial exchange, is integrated with lending protocol Compound and decentralized derivatives exchange dYdX. It’s also among the most user-friendly of crypto wallets.

Other wallets, like MyCrypto and MyEtherWallet, natively support hardware wallets, making them a good choice if you want to interact with DeFi protocols using crypto held in cold storage.

Some wallets prioritize security. Gnosis allows for multi-signature transactions, or transactions that several people have to confirm at the same time. Argent lets you nominate “guardians” who can help you recover access to your wallet if you forget your private keys.