What is DeFi?
DeFi is banking without banks. It's an ecosystem of financial services built on blockchain - lending, borrowing, trading, and earning interest - all without middlemen.
DeFi Fundamentals
DeFi = Decentralized Finance. It's a collection of financial applications built on blockchain that operate without banks, brokers, or traditional financial institutions.
How DeFi Works:
- Smart contracts replace banks and lawyers
- Code automatically executes transactions
- Anyone can participate with just a wallet
- 24/7 - no business hours, holidays, or waiting
- Permissionless - no applications or credit checks
Traditional bank: Ask teller → Fill forms → Wait for approval → Get service
DeFi: Connect wallet → Click button → Done
Smart contracts are like automated vending machines for financial services.
DeFi by the Numbers:
- $50+ billion locked in DeFi protocols
- Millions of users worldwide
- Thousands of applications
- Operates on multiple blockchains (Ethereum, Solana, etc.)
DeFi vs Traditional Finance
| Aspect | Traditional Finance | DeFi |
|---|---|---|
| Access | Bank account required | Just need a wallet |
| Hours | Business hours only | 24/7/365 |
| Speed | Days for transfers | Seconds to minutes |
| Control | Bank controls your money | You control your assets |
| Requirements | ID, credit check, approval | None - permissionless |
| Transparency | Hidden fees, opaque | All code is public |
| Risk | Insured (FDIC) | No insurance* |
Unlike banks, DeFi has no FDIC insurance. If a protocol is hacked or fails, you can lose everything. With freedom comes responsibility.
Key DeFi Services
Decentralized Exchanges (DEXs)
Trade crypto without a centralized exchange controlling your funds.
- Uniswap - Largest DEX on Ethereum
- SushiSwap - Multi-chain DEX
- Curve - Best for stablecoin swaps
Lending & Borrowing
Lend your crypto to earn interest, or borrow against your holdings.
- Aave - Most popular lending protocol
- Compound - Pioneer of DeFi lending
- Earn 2-10%+ APY on deposits
- Borrow without selling your crypto
Yield Farming
Earn rewards by providing liquidity to protocols.
- Deposit funds into liquidity pools
- Earn trading fees + token rewards
- Higher yields = higher risks
Stablecoins
Crypto pegged to USD value - essential for DeFi.
- USDC - Circle-backed, highly regulated
- USDT - Most widely used
- DAI - Decentralized, crypto-backed
DeFi Risks You Must Know
The high yields in DeFi come with high risks. Many people have lost everything. Never invest more than you can afford to lose completely.
Major Risks:
- Smart contract bugs - Code errors can be exploited by hackers
- Rug pulls - Developers steal deposited funds
- Impermanent loss - Liquidity providers can lose value vs holding
- Oracle failures - Price feeds can be manipulated
- Liquidation - Loans can be forcibly closed if collateral drops
- Regulatory risk - Governments may ban or restrict DeFi
How to Stay Safer:
- Only use audited protocols
- Stick to established protocols (Uniswap, Aave, etc.)
- Start with small amounts to learn
- Understand what you're investing in
- Never chase unsustainably high APYs
If a protocol offers 1000% APY, ask yourself: where does that yield come from? Often, it's from new depositors (Ponzi) or unsustainable token emissions. Sustainable yields are typically 2-15%.