DeFi Guides

DeFi (Decentralized Finance) replaces traditional banks with smart contracts. Trade on Uniswap without brokers. Lend on Aave without credit checks. Earn 8-15% yields providing liquidity. Total value locked in DeFi reached $107 billion in January 2026.

These 6 guides teach DeFi fundamentals and popular protocols. You'll understand how DEXes work, how to provide liquidity safely, how lending protocols operate, and how to avoid common pitfalls like impermanent loss.

Start with "What is DeFi?" for basics. Then try Uniswap with $20-50. Learn about impermanent loss before providing liquidity. Never invest more than you can afford to lose.

Traditional finance runs on banks, brokers, and intermediaries taking fees. DeFi runs on smart contracts - code that executes automatically when conditions are met. No middlemen, no business hours, no permission needed.

Permissionless Access

Anyone with internet and crypto wallet can use DeFi. No KYC, no credit checks, no minimum balances. Unbanked people in developing countries access same protocols as Wall Street hedge funds.

Connect MetaMask to Uniswap, swap tokens in 30 seconds. No account creation, no waiting for approval. This openness is revolutionary but also enables scams and money laundering.

24/7 Operation

Stock markets close nights and weekends. Banks take holidays. DeFi never stops. Trade Ethereum at 3am Sunday. Borrow USDC on Christmas Day. Smart contracts don't sleep.

This constant operation means prices move 24/7. A project can get hacked at 2am while you sleep and your funds drain before you wake. Convenience comes with responsibility.

Transparent and Auditable

Every transaction is on-chain, visible to everyone. Check smart contract code on Etherscan. See exactly how much money is in protocol, who's using it, what fees they pay. Banks hide this information.

Transparency doesn't guarantee safety. Code can be transparent and still have bugs. But at least you can verify claims - if protocol says "no fees," you can check the contract code to confirm.

Composability (Money Legos)

DeFi protocols integrate like Lego blocks. Deposit USDC in Aave, receive aUSDC (interest-bearing token), use aUSDC as collateral on Compound to borrow ETH, swap ETH on Uniswap. All in one transaction.

This composability enables sophisticated strategies but also creates complexity and risk. One protocol failing can cascade through connected protocols. Terra/Luna collapse in May 2022 dragged down dozens of integrated DeFi apps.

Self-Custody (You're Responsible)

Bank gets robbed? Your money is FDIC insured. Smart contract gets hacked? You lose everything with no recourse. This is the price of removing intermediaries - all responsibility falls on you.

DeFi hacks stole $3.1 billion in 2022, $1.7 billion in 2023, $2.2 billion in 2024, and $890 million just in first quarter of 2026. Most users never recovered funds. Use DeFi understanding you might lose everything.

DeFi ecosystem spans dozens of protocol types. These six categories handle majority of activity and total value locked:

Decentralized Exchanges (DEXes)

Trade crypto peer-to-peer without centralized exchange. Uniswap, SushiSwap, Curve, PancakeSwap. Use automated market makers (AMM) instead of order books. Liquidity comes from users who deposit token pairs and earn fees.

DEX trading volume hit $1.8 trillion in 2026, roughly 15% of centralized exchange volume. Uniswap alone processed $650 billion. DEXes charge 0.05-0.3% per swap, cheaper than most centralized exchanges.

Lending & Borrowing Platforms

Lend crypto and earn interest. Borrow by providing collateral. Aave, Compound, Maker are largest. Interest rates are algorithmic - more borrowing demand = higher rates. Lenders earn 2-8% on stablecoins, borrowers pay 3-12%.

All loans are over-collateralized. Borrow $7,000 USDC? Deposit $10,000 ETH as collateral. If ETH price drops and collateral value falls below threshold, you get liquidated (collateral sold to repay loan plus penalty).

Yield Farming & Liquidity Mining

Provide liquidity to protocols and earn tokens as rewards. Early days offered 100-1000% APY (unsustainable). Current realistic yields: 5-20% on stablecoins, 10-50% on volatile pairs.

High yields come from protocol tokens being issued as incentives. These tokens often lose 80-95% of value as hype fades. Calculate "real yield" (fees earned) vs "emissions yield" (worthless tokens printed).

Stablecoins

Crypto tokens pegged to $1. USDC and USDT backed by real dollars in bank accounts. DAI is algorithmic, backed by crypto collateral. Stablecoins enable DeFi to function - you can't lend/borrow if collateral value swings 20% daily.

Stablecoin market cap: $150 billion (January 2026). USDT dominates with $95B, USDC has $38B, DAI has $4.2B. Algorithmic stablecoins are risky - remember UST/Luna depegging and collapsing to zero in 2022.

Derivatives & Synthetic Assets

Trade futures, options, and synthetic versions of real-world assets. GMX, dYdX, Synthetix. Access gold, stocks, commodities exposure using crypto. Use trading (5-50x) available, extremely risky.

Synthetic asset protocols faced regulatory scrutiny in 2023-2024. Offering tokenized Tesla stock or gold without proper licensing attracted SEC attention. Many shut down US operations or switched to crypto-only synthetics.

Yield Aggregators

Automatically move your funds between protocols to maximize yield. Yearn Finance, Beefy, Convex. Deposit USDC, strategy auto-compounds across Aave, Compound, Curve hunting best rates.

Aggregators charge 2-20% performance fees. Convenient but adds another layer of smart contract risk. If aggregator gets hacked, your funds are gone even if underlying protocols are safe.

These protocols dominate DeFi by total value locked, security track record, and user adoption:

DeFi isn't free money. These risks cause most losses. Understand them before depositing funds:

Smart Contract Risk

Code bugs enable hackers to drain funds. Poly Network hack (2021): $611M stolen. Wormhole hack (2022): $325M. Euler Finance (2023): $197M. Even audited protocols get exploited.

Audits help but don't guarantee safety. Dozens of audited protocols still got hacked. Use protocols with multiple audits, bug bounties, and long track records. Avoid brand-new protocols regardless of APY promises.

Impermanent Loss

Provide liquidity to ETH/USDC pool. ETH pumps 50%. Your returns lag simply holding ETH because pool rebalances automatically. You "lose" compared to just holding. Loss becomes permanent when you withdraw.

Impermanent loss hits hardest with volatile pairs (ETH/ALT). Less severe with stablecoin pairs (USDC/USDT). Many liquidity providers lose money after accounting for IL even with fee earnings. Study this thoroughly before LPing.

Liquidation Risk

Borrow against ETH collateral. ETH price drops 30%. Your collateral value falls below liquidation threshold. Protocol automatically sells your ETH to repay loan, you lose collateral plus 5-15% liquidation penalty.

Use conservative collateral ratios. If protocol allows borrowing up to 75% of collateral value, borrow maximum 50%. This gives buffer for price swings. Monitor positions during volatile markets.

Rug Pulls and Exit Scams

New DEX launches offering 800% APY. Thousands deposit funds. Developers drain liquidity overnight and disappear. Squid Game token (2021) rug pulled $3.4M. Meerkat Finance (2021) took $31M and vanished.

Check if liquidity is locked (can't be withdrawn by developers). Verify team is doxxed (real identities public). Look for time-locked smart contracts. Avoid anonymous teams promising unrealistic returns.

Gas Fees Eating Profits

Ethereum gas fees spike to $50-200 during congestion. Enter liquidity pool: $80. Exit pool: $80. Claim rewards: $40. Your $500 position needs 40% gain just to break even after fees.

Use Layer 2s (Arbitrum, Optimism, Base) for lower fees ($0.50-$5). Or use alternative chains (Polygon, BSC) though they have different security tradeoffs. DeFi on Ethereum is expensive for small amounts.

Protocol Governance Changes

Token holders vote on protocol changes. Governance proposal passes to increase fees from 0.3% to 1%. Or change liquidation thresholds. Or upgrade contracts with new bugs. You're subject to community decisions.

Most users don't participate in governance. Whales and VCs control votes. They can pass changes benefiting themselves at expense of small users. Monitor governance forums if you have significant funds deposited.

Start With $20-50 Test Amount

Don't learn with $5,000. Use tiny amount to understand how protocols work. Swap $20 on Uniswap. Provide $30 liquidity to USDC/USDT pool. Experience gas fees, transaction confirmations, UI quirks.

Make mistakes with small amounts. Approve wrong token. Set slippage too low and transaction fails. Pay $15 gas fee on $20 swap (ouch but lesson learned). These mistakes cost less than $50 in tuition.

Master One Protocol Before Expanding

Become expert on Uniswap before trying PancakeSwap, SushiSwap, Curve. Understand Aave completely before exploring Compound. Depth beats breadth when learning DeFi.

Read protocol documentation. Watch YouTube tutorials. Read post-mortems of hacks on that protocol. Understand every parameter (collateral ratio, liquidation threshold, utilization rate). Only then scale up investment.

Use Hardware Wallet for Serious Amounts

MetaMask browser extension convenient but vulnerable to phishing and malware. For $5k+ in DeFi, use Ledger or Trezor. Every transaction requires physical confirmation on device.

Hardware wallet won't save you from approving malicious contract. But it prevents compromised browser from draining wallet automatically. Extra friction (clicking hardware button) makes you think twice before approving.

Revoke Unlimited Approvals

When you approve token spending, many dApps request unlimited access. If that protocol gets hacked later, attacker can drain your wallet even if you're not actively using protocol.

Use revoke.cash monthly to check and revoke old approvals. Or approve exact amounts instead of unlimited. Takes extra transactions (costs more gas) but much safer for paranoid users.

Never Invest More Than You Can Lose

DeFi is high-risk. Protocols get hacked. Tokens go to zero. Your calculation might be wrong and you suffer impermanent loss. Only use money you could lose entirely without affecting your life.

Don't mortgage house to yield farm at 200% APY. Don't use DeFi with emergency fund. Don't borrow money to put in liquidity pools. Conservative position sizing is mandatory in DeFi.

Beginners should stick to top two strategies. Both offer decent returns with manageable risk. Avoid anything promising over 50% APY unless you enjoy losing money to rug pulls.

Follow this checklist before using any DeFi protocol. Skip even one step and you risk losing funds:

Research Phase

☐ Protocol is older than 6 months
☐ TVL exceeds $50 million
☐ Multiple security audits from reputable firms (CertiK, Trail of Bits, OpenZeppelin)
☐ Active bug bounty program
☐ No major exploits in past 12 months
☐ Community discussions on Reddit/Twitter are positive
☐ Developers are doxxed or protocol is backed by known VCs

Security Setup

☐ Using hardware wallet for amounts over $5k
☐ Bookmarked official protocol URL (not clicking links)
☐ Verified contract address on official docs
☐ Tested with small amount first ($20-50)
☐ Understand emergency exit procedure
☐ Checked recent governance proposals for red flags

Risk Assessment

☐ Calculated maximum loss scenario (liquidation price, impermanent loss)
☐ Set up price alerts for critical levels
☐ Understand fee structure (entry, exit, performance, gas)
☐ Know lock-up periods if any
☐ Verified APY is sustainable (not just token emissions)
☐ Comfortable losing entire amount deposited

Ongoing Monitoring

☐ Check positions weekly minimum
☐ Monitor protocol Twitter for announcements
☐ Watch for unusual TVL drops (possible exploit)
☐ Review and revoke old approvals monthly
☐ Rebalance when necessary
☐ Document all transactions for taxes

Use Looping

Deposit USDC in Aave, borrow USDC against it at lower rate than lending rate, deposit borrowed USDC again. Repeat 3-5 times. Amplifies yield but also amplifies liquidation risk. Popular during stable rate environments.

Example: Lending rate 4%, borrowing rate 3%. Loop 4x to achieve 16% effective yield on original deposit. But if rates flip (borrowing becomes more expensive), strategy loses money. Requires active management.

Flash Loans

Borrow millions without collateral, use it within same transaction, repay before transaction ends. Used for arbitrage, liquidations, collateral swaps. Requires coding skills. Normal users don't need flash loans.

Flash loans also enable attacks. Attacker manipulates oracle price using borrowed funds, exploits protocol, repays loan in same transaction. Many major DeFi hacks used flash loan attacks.

Cross-Chain DeFi

Use bridges to move assets between chains. Lend on Aave (Ethereum), farm on PancakeSwap (BSC), stake on Anchor (Terra before collapse). More opportunities but exponentially more risk.

Bridges are huge exploit targets. Ronin Bridge ($625M), Wormhole ($325M), Nomad ($190M) all got exploited. Every chain you add multiplies attack surface. Stick to one chain when learning.

Start with "What is DeFi?" for fundamentals. Try Uniswap with small amount. Learn about liquidity pools and yield farming. Study impermanent loss before providing liquidity: