What Are DeFi-Enabled Wallets and How Do They Work?

What Are DeFi-Enabled Wallets?  

A DeFi (decentralized finance) enabled wallet is a blockchain-based wallet that serves as both a way of storing digital assets and interacting with DeFi features such as lending and swapping. Through connectivity with DeFi protocols, a DeFi-enabled  wallet can serve as a gateway to a broader range of crypto activities than those offered by non DeFi-enabled wallets. 

Users with assets in these wallets can carry out actions such as swapping tokens, or use their balances for yield-generating activities such as lending, directly from the wallet interface. Some wallets will even charge zero gas fees on DeFi activity carried out through the wallet UI. 

DeFi-enabled wallets are also more suited to holding assets other than regular cryptocurrencies such as bitcoin and ether. Their DeFi features make them well-suited to hold other kinds of digital assets such as tokenized stocks, since they can interface directly with the protocol on which these assets are issued and offer unique yield-earning opportunities on those assets. Through their connectivity to DeFi protocols, DeFi-Enabled wallets are a better choice for users wanting to make the most of their balances.  

How Do DeFi-Enabled Wallets Work?

In order to interact with DeFi protocols, DeFi-enabled wallets construct transactions which inform the relevant protocols or smart contract of what should happen. For example, if a user wants to leverage their tokenized stocks balance to start generating yield, the wallet will generate the necessary transactions with relevant protocols or contracts to provide liquidity or collateral in exchange for the yield. 

Similarly, if a user wishes to carry out a swap of one of their assets into another, the wallet will sign the required transactions, and a centralized exchange, or decentralized exchange smart contract will execute the trade.

Many DeFi-enabled wallets can also enact cross-chain chain swaps. This is where a user’s assets are moved across blockchain protocols in order to take advantage of higher yields, or simply to have their assets in a different network. In this case, the DeFi-enabled wallet leverages a bridge integration in order to move assets across. For example, moving BTC on the Bitcoin network to the Ethereum network to receive wBTC (wrapped bitcoin).  

What Are Some Security Tips for Using DeFi-Enabled Wallets? 

DeFi-enabled wallets allow users to make the most of their digital asset balances through yield-generating activities and more, but because of this they demand robust security practices to keep the funds contained safe. As with any self-custody wallet, keeping your private keys somewhere safe and never sharing them is crucial to protect your funds. If using a recovery phrase, it’s best to store this in an offline format such as a notepad, and store it in a secure location. 

It’s also important to make sure you’re interacting with the genuine version of the wallet interface and avoid phishing links. DeFi-enabled wallets have the ability to sign transactions, which makes it even more important to verify the authenticity of the webpage you are on. Additionally, setting up a method of biometric authentication, such as Face ID, can introduce another layer of security and protect your funds from unauthorized access.

DeFi-enabled wallets represent a huge leap forward in the functionality and interconnectivity of crypto wallets and are an important evolution in how we engage with digital assets. By combining a secure means of storing assets with the financial opportunities offered by DeFi, this kind of wallet helps bridge the gap between HODLing and unlocking the full potential of crypto balances. As the global economy becomes increasingly digitized, easy access to smart contract powered tools will become increasingly important, and DeFi-enabled wallets are poised to lead the charge.