I took out a loan with cryptocurrency and didn't sign a thing

Last week, I took out a loan without meeting anyone, signing anything, or even interacting with a human being.

I also invested in a variety of assets that earn interest of up to 5.9 percent a year. I did it all on my own, from my computer. All I needed was some cryptocurrency and a knowledge of how these systems work.

The amounts were tiny: The loan was $30, and I had $95 worth of crypto earning interest. But I could've easily done the same with much larger amounts, at those exact same terms.

To do all this, I was using freely available DeFi, or decentralized finance, services based on the Ethereum blockchain. DeFi is one of the key usages of Ethereum, which, besides being a cryptocurrency, is also a decentralized app platform where most of the currently available DeFi apps reside.

DeFi, in general, encompasses financial services which are transparent, decentralized, and trustless. Instead of having to go to a bank to get a loan, provide your ID and credit score, then have a human assess your situation and decide whether you can get the money, with DeFi it's all algorithmic. A smart contract, with an open-source code available to everyone to check, handles everything. All you need is to provide some ether or ETH — the currency of Ethereum — or another crypto asset as collateral and choose what you want to do. The smart contract takes care of the rest.

Like I said, all of these services are trustless and decentralized — up to a degree. Some require you to create an account; with others, you don't even have to enter your email anywhere. Of course, rules apply: You cannot just lend thousands of dollars worth of crypto without any collateral.

Dead simple, even for a newbie

It's been possible to do this for quite a while, thanks to startups such as Maker, Compound, Nexo, and others. But the process wasn't always simple for someone who doesn't know much about Ethereum and cryptocurrencies in general.

However, a new Ethereum mobile wallet called Argent removes nearly all the friction from DeFi —literally anyone can use it with very little or no prior knowledge. Argent is currently in an invite-only beta, but it's fully functional, and everything I've done with it was real — actual cryptocurrency was moved around and locked in smart contracts that provided the functionality described above.

Making a savings account in Argent is dead simple. Credit: stan schroeder/Argent/mashable

Let's say you're a complete newbie when it comes to cryptocurrencies. After installing Argent, which is a regular mobile app (I used the iOS version, but it's also available for Android), you have the option of adding funds via Apple Pay or Card, or a bank transfer, or you can send cryptocurrencies directly from a wallet or exchange. Going through an exchange may be cheaper, but adding funds with Apple Pay is the simpler option.

So you've bought some ETH (you can buy other coins, too, but let's stick to ETH, as it's the basis for the DeFi services covered in this text). Switch to the Finances tab, and you'll be presented with two options: One is Savings, which uses another service called Compound to invest your funds. There really isn't much more to it: You select one of the assets you own, in this case ETH, and Compound will lock it into a smart contract, which will immediately start giving you a return, calculated in real time.

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My small portfolio is growing. Credit: stan schroeder/argent/Mashable

Not all assets carry an equal risk and reward, and not all are equally volatile. For ETH, you'll get a tiny, 0.02% yearly interest rate, and since the price of ETH can be very volatile, you should lock your ETH into this contract only if you plan on holding onto it regardless of price changes. On the other hand, DAI is a stablecoin whose value closely tracks with that of the dollar, making it far less volatile. It also currently yields a better return — 5.88% annually at the time of writing — so if your goal is to protect your principal in dollar terms and earn some money, it's a better option.

A loan with no need for permission

Taking out a loan uses a service called Maker, which isn't very easy on its own, but Argent simplifies that process, too. It lets you borrow a loan against collateral in ETH, to a certain point. Your collateral is locked in a smart contract, and will be returned to you when you pay off your loan plus interest (which, for me, was 9% annually).

Getting a loan in DAI requires you to lock some ETH as collateral into a smart contract. Credit: stan schroeder/argent/Mashable

To do this, all you need to do is play with a couple of sliders, which let you adjust your collateral and the amount of money you want to loan. However, you need to know that Maker contracts also include a liquidation price — if the price of ETH falls below that price, your collateral will be liquidated to pay off the loan, together with a certain penalty. You don't want that to happen, so you should choose a safe loan-to-collateral ratio — which is also clearly laid out in Argent's interface.

Note that this is different from getting a bank loan, which in some cases requires no collateral besides proof of good standing with your employer. But the advantage of decentralized finance is obvious: You can put your money to work, or take out a loan, without asking anyone for permission. Everything is taken care of algorithmically.

Is this safe?

In theory, yes. In practice, I wouldn't trust any of these services with large amounts of money just yet. There are several reasons for this: There could be a bug in the smart contract's code that someone could exploit to steal your money. These contracts are often verified by experts, but bugs sometimes do go unnoticed. The volatility of cryptocurrencies — ETH, for example, often loses or gains 5% in value in a single day — is an issue, as well. Yes, you can use a stablecoin like DAI or USDC to avoid volatility, but in the case of an (unlikely) catastrophic ETH crash, even DAI could become unstable.

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Also, note that my "portfolio," as described above, isn't the greatest. I'm paying a pretty high interest rate on my loan while at the same time receiving a paltry interest for my savings. But it was all done just to illustrate the potential of DeFi; I'd do it differently if I wanted to make the most of it.

A few notes

All of the services I've used are on the Ethereum blockchain. There are a few on competing blockchains, like EOS and Tron, but the vast majority of DeFi services run on Ethereum.

Argent, which was used for this example, is just one of many cryptocurrency wallets you can use and definitely not the only option for DeFi. I've chosen it because it has a nice, clean interface, and it greatly simplifies the process of taking out a loan on Maker. For more options, check out this website.

In conclusion

DeFi is in a nascent stage. Some of these services, like Maker, have been around for years, but were (some still are) too complex even for techies, let alone people who aren't very tech-savvy.

But this is changing. Services like Compound and apps like Argent are making DeFi accessible to everyone. And while I'd always advise learning about how these services work in the background before investing even a cent of your money, the fact that DeFi is getting simpler means more people will get on board.

DeFi is also quickly spreading to cover far more complex financial products. Every week, I hear about new products or services, or even entire new classes of services. A few examples: A service called Rocket allows you to get a loan using collectibles as collateral; PoolTogether is a lottery in which you cannot lose, only win; and Synthetix offers digital assets — tokens on the Ethereum blockchain — that provide exposure to other assets, such as Tesla stock, or gold.

The examples I've given are just a small taste of what may come in the future.

Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH.