What is DeFi?
DeFi (Decentralized Finance) is an ecosystem of financial applications built on smart contracts, mainly on the Ethereum network. The goal is to recreate traditional financial services — lending, savings, exchange, insurance — without banks, intermediaries or KYC verification.
Decentralized Exchanges (DEX)
Unlike centralized exchanges (CEX) like Binance, DEX platforms such as Uniswap, Curve, PancakeSwap and Jupiter (Solana) operate without an order book — they use the Automated Market Maker (AMM) model. No KYC, no intermediaries — but also no protection if you make a mistake.
Liquidity Pools
Users deposit a token pair (e.g., ETH + USDC) into a pool and receive a share of the swap fees in return. This is passive income — but it comes with a risk called impermanent loss: if one token's price moves significantly, your LP position may be worth less than simply holding.
Lending and Borrowing
Protocols like Aave and Compound allow you to borrow cryptocurrencies against collateral. Deposit ETH, borrow USDC — no bank, no credit score. If the collateral value drops below a threshold, the position is automatically liquidated.
Yield Farming
Yield farming is a strategy of maximizing returns by moving between protocols — you deposit tokens wherever the APY is currently highest.
DeFi risks
- Smart contract bug — an audit reduces risk but doesn't eliminate it.
- Rug pull — anonymous team abandons the project and withdraws liquidity
- Impermanent loss — LP position may be worth less than simply holding
- Gas fees — on Ethereum mainnet, gas can cost more than the transaction itself
- Oracle manipulation — attackers manipulate the prices a protocol receives