DeFi Fundamentals
Discover decentralized finance: lending, borrowing, staking, and yield farming.
1. Introduction to DeFi
Decentralized Finance (DeFi) refers to financial services built on blockchain technology that operate without traditional intermediaries like banks. Everything runs on smart contracts.
Traditional Finance
- Banks control your funds
- Business hours only
- High fees and delays
- Permission required
- Limited transparency
DeFi
- You control your funds
- 24/7/365 access
- Lower fees, instant
- Permissionless
- Fully transparent
2. Liquidity Pools
Liquidity pools are smart contracts that hold pairs of tokens and enable decentralized trading. Users provide liquidity and earn fees.
Choose a Pool
Select a trading pair (e.g., AI/USDC) on a DEX
Provide Equal Value
Deposit both tokens in equal USD value
Receive LP Tokens
Get liquidity provider tokens representing your share
Earn Trading Fees
Collect portion of all trading fees (usually 0.3%)
3. Staking and Yields
Staking
Risk Level: Low
Returns: 5-20% APY
How: Lock tokens to secure network
Best for: Long-term holders
Yield Farming
Risk Level: Medium-High
Returns: 20-200%+ APY
How: Provide liquidity, stake LP tokens
Best for: Active managers
Lending
Risk Level: Low-Medium
Returns: 3-15% APY
How: Lend tokens to borrowers
Best for: Stable income seekers
4. Risk Management
DeFi Risks to Understand:
- Smart Contract Risk: Bugs or exploits in code
- Impermanent Loss: Value change in liquidity pools
- Rug Pulls: Developers abandon project
- Flash Loan Attacks: Complex exploits draining pools
- Regulatory Risk: Law changes affecting DeFi
Safe DeFi Practices
- Start with small amounts to learn
- Use audited protocols only
- Diversify across multiple platforms
- Understand all risks before investing
- Never invest more than you can lose
- Check smart contract audits
- Be wary of extremely high APYs
Test Your Knowledge
Question 1: What is a liquidity pool?
A smart contract holding pairs of tokens that enables decentralized trading. Liquidity providers earn fees from traders who use the pool.
Question 2: What is impermanent loss?
When token prices in a liquidity pool diverge significantly, you may have less value than if you just held the tokens separately. It's "impermanent" because prices may re-balance.