Decentralized finance has only picked up steam since bursting onto the scene with what many dub “DeFi Summer 2020.”
The total value locked in DeFi protocols has grown from a meager $2 billion to well over $200 billion since Summer 2020.
That is quite the increase in total value locked. It has also led to many developers attempting to create their own DeFi. In our opinion, this is mostly a moot point because no one will trust a new DeFi wallet because of the large number of cryptocurrency.
MetaMask is currently the most popular DeFi wallet. It will likely stay that way for a few years barring any hack of the wallet application.
Anyway, this article will cover some key features that you look for in a DeFi wallet. We will also cover the different types of DeFi wallets you can use.
Custodial vs Non-Custodial Wallets
First of all, all DeFi wallets are non-custodial by definition (decentralized). Anyone trying to peddle a custodial DeFi wallet is likely trying to scam you.
That said, there is a huge, major difference between the two types of wallets.
You own the private keys with a non-custodial wallet.
That’s the only difference.
It’s also a major difference between the two types of wallets.
There’s a saying in cryptocurrency that goes like, “Not your keys; not your crypto.”
The saying refers to the difference between a custodial and non-custodial wallet.
Basically, whoever owns the private keys, owns the cryptocurrency in the wallet. For instance, any Bitcoin sitting in your Coinbase account is not actually Bitcoin. It’s actually a liability on Coinbase’s balance sheet. The liability is paid in the form of Bitcoin, but it’s still a liability on their balance sheet.
So, what’s the problem with custodial wallets?
There are a few huge problems with custodial wallets. Here they are in list format:
- The wallet holder does not have to give you the cryptocurrency in “your” wallet.
- Bankruptcy or some other form of fraud could cause the company holding “your” cryptocurrency to become insolvent. Good luck getting paid in that scenario.
- Hackers drain all the funds from the custodial wallet.
- Mt. Gox is the most famous example of this. For those that don’t know, Mt. Gox was an early cryptocurrency that was hacked for hundreds of millions of dollars in 2014.
- Custodial wallets have fees.
- Custodial wallets may have questionable security. You also have to rely on a faceless organization for the security of your money.
- Custodial wallets are generally not anonymous.
- Anonymity is a key feature of DeFi. You almost always lose that with a custodial wallet.
Final Verdict on Custodial vs Non-Custodial Wallets
The short of it is that custodial wallets are terrible. They have a lot of risk in exchange for having a slightly more intuitive user interface.
It’s not worth it to use a custodial wallet.
The good news is that there are not any custodial wallets that work with DeFi. If there are custodial wallets that work with DeFi, then they are not popular in the community because no one talks about them.
Custodial DeFi wallets likely would not be popular, either. DeFi users value their privacy and security more than the average cryptocurrency holder.
Key Features of a DeFi Wallet
We covered the downsides of a centralized, custodial wallet. However, that did not include the key features you should look for in a DeFi wallet. Here are some features you should look for in a DeFi wallet:
- You have the key phrase.
- If you do not have the key phrase, then it’s not a DeFi wallet.
- “If you do not have the keys, then it’s not your crypto.”
- Compatibility with multiple tokens/chains.
- You want a wallet that can hold the different types of tokens found on chains (ie. ERC-20, ERC-721, etc. on Ethereum).
- Browser compatibility.
- DeFi occurs on Web3 applications. This means you must access it from a web browser. Basically, you want a DeFi wallet that is compatible with your browser and DeFi protocols.
That covers it for the features to look out for in a DeFi wallet.
The good news is that the list of features to look for is very short. The list of good DeFi wallet is also short.
Are Binance DeFi Products Safe?
Binance, and other cryptocurrency exchanges, offer investment products that operate something like this:
- Deposit money on Binance.
- Buy cryptocurrency.
- Place that cryptocurrency in a “DeFi” investment product on Binance that earns a set interest rate per year.
People get that confused with DeFi.
It’s similar in the fact that you earn interest on your deposit. However, you do not own the keys to that wallet.
It’s a custodial wallet.
Binance could cancel your account, lose your money to one of the many DeFi scams or hacks, go out of business, and so on.
It’s basically all the risk of DeFi (hacks and scams) combined with all the risk of using a centralized exchange.
To top it all off, Binance charges a small fee to use the “DeFi” products!
You would expose yourself to less risk and make more money simply downloading a DeFi wallet and doing it yourself.
Best DeFi Wallets of 2021
The best DeFi wallet of 2021 is a very short list.
In fact, there is only one wallet on the list, which makes choosing a wallet easy.
If you have heard anything about DeFi, then you have surely heard about MetaMask. It’s a DeFi wallet that is actually an open-source browser extension.
That makes connecting to DeFi protocols extremely simple in itself.
MetaMask also works with pretty much every DeFi protocol. A DeFi protocol that does not work with MetaMask would likely not be very popular simply because everyone uses MetaMask.
Finally, the wallet is extremely simple to use, even for beginners. It’s also simple enough to find a guide on how to use the wallet in the event that you get stuck with some feature.
For those reasons, we highly recommend using MetaMask if you want to venture into the world of DeFi.
Note: We know that more wallets exist, but most of those wallets do not have the compatibility of MetaMask. A beginner should use MetaMask.
That covers it for some features of a DeFi wallet.
The most important feature is that the wallet is non-custodial. This means that you control the cryptocurrency keys of the wallet.
If you do not control the keys, then you do not have a DeFi wallet. You have a wallet from a centralized company that is likely using DeFi as a marketing tactic.
It’s not DeFi, though. Don’t be fooled.