Pt 3— Exchanges
DeFi involves doing transactions on chain. To do that, first you must put some of your money on chain. That needs an exchange. While exchanges can do many things, for this guide they are merely a pipe that moves money from your bank onto a blockchain.
The process will involve the following steps.
- Pick an exchange
- Open an account at the exchange
- Move money to the exchange
- Choose the chain
- Move the money from the exchange onto the blockchain
First what is an exchange? An exchange is a company that does transactions on blockchains on your behalf. The best analogy is a brokerage for blockchains. For me, they are terrible organizations (even the best ones) but a necessary evil. If you go back to the first two reasons to do DeFi, they do not help with either of them. They do not allow you out of the banking system, because they are just like banks only worse. They are not good for transactions outside your currency, because they just want to trade crypto. You trust them with your money. As FTX has shown (which was an exchange), they can be complete scams.
If you want to trade crypto, then exchanges can be quite useful. Trading can be done more easily than on chain. The user interface (especially on mobile) is much easier. Exchanges wants you to trade crypto. Their emails and notifications will consistently pump you to trade some new coin. This is how they make their revenue. They allow you to move money on chain (mostly), but they prefer if you did not. Once the money is onchain, they lose control, they cannot make any more money off of you.
Governments have woken up to exchanges and begun regulating them. Because exchanges are traditional companies, they are easy for government to regulate. In addition, they can instruct banks to only allow transfers to regulated exchanges. This allows them to control how their citizens use crypto. As an example, in Canada, normal people are only allowed to transfer $30K a year into exchanges.
Pick an Exchange
Many exchanges are local. They need to accept transfers from the local banks. If you have access to very large and reputable exchanges (Kraken or Coinbase) they may be your best bet. You probably have multiple exchanges to choose from, and they compete aggressively for new customers.
Really, from our perspective, only two things are important. You want to easily open an account. Next, you want to be able to transfer money on chain. Exactly which chain is discussed in the next article but at a minimum to Ethereum.
Open an account at the exchange
Opening an account varies widely depending on the exchange and the jurisdiction. It can be very simple or it can be ridiculously difficult. Let’s face it. Governments don’t like crypto because it threatens their control over monetary policy. They don’t want to ban it. So, in regulations to exchanges they can make it legal but require many steps (especially for businesses) before the account is opened. They can say this is to protect people from scams. Mostly, they want to make opening an exchange account so difficult that people give up.
First, it pays to do your research beforehand. Second, even if it’s difficult, push through. Once the account is open, there is rarely any other problems.
Move money to the exchange
This is usually the easiest part. Move the money from your bank account to the exchange. The exchange will help in this, as it is in their interest to get your money into their exchange.
Choose the chain
Before you move your funds off of the exchange onto a blockchain, you have to choose the blockchain. It has to be one that the exchange interfaces with. This is covered in the previous article. At a minimum, move your funds to Ethereum. But, if you can move them directly onto a layer 2 you will save some fees.
Move the money from the exchange onto the blockchain
The final step is to move the money from the exchange onto the chosen blockchain. Do this step carefully. First, move a small amount onchain. Ensure that it arrives in the correct account and you were able to make test transactions. Once you are confident you have control of the account onchain, move the rest of the money.
The next few articles will go into wallets, device setup and making transfers. Read those articles before completing this step.