What is DeFi?

DeFi (Decentralized Finance) refers to financial services built on public blockchains, primarily Ethereum. These services replicate traditional finance (lending, borrowing, trading) without centralized intermediaries.

How DeFi Works

DeFi applications use smart contracts - self-executing code on the blockchain that automatically enforces agreement terms without human intervention.

Key Components

  1. Smart contracts - Automated agreements
  2. Tokens - Digital assets representing value
  3. Wallets - User interfaces for interaction
  4. Protocols - Sets of rules governing services

Decentralized Exchanges (DEXs)

  • Uniswap - Largest DEX on Ethereum
  • PancakeSwap - Leading on BNB Chain
  • Trade directly from your wallet

Lending Protocols

  • Aave - Multi-chain lending
  • Compound - Ethereum lending pioneer
  • Earn interest or borrow against collateral

Yield Aggregators

  • Yearn Finance - Automated yield optimization
  • Beefy Finance - Multi-chain vaults
  • Maximize returns automatically

Stablecoins

  • DAI - Decentralized dollar
  • FRAX - Algorithmic stablecoin
  • Price-stable tokens

DeFi Benefits

  • Permissionless - No approval needed
  • Transparent - All code is open source
  • 24/7 access - No business hours
  • Global - Anyone with internet can participate
  • Composable - Protocols work together

DeFi Risks

Smart Contract Risk

  • Code bugs can lead to losses
  • “Rug pulls” and exploits

Impermanent Loss

  • Price changes affect liquidity providers
  • Can reduce returns

Liquidation Risk

  • Collateral requirements in lending
  • Volatile markets can trigger liquidations

Regulatory Uncertainty

  • Laws still evolving
  • Future restrictions possible

Getting Started with DeFi

  1. Set up a Web3 wallet (MetaMask, etc.)
  2. Buy crypto on exchanges like Coinbase
  3. Transfer to your wallet
  4. Connect to DeFi protocols
  5. Start with small amounts