DeFi Basics
Introduction to Decentralized Finance and trading protocols
Welcome to Decentralized Finance
DeFi represents a new paradigm in finance, where traditional financial services are recreated on blockchain networks without intermediaries.
What is Decentralized Finance (DeFi)?
DeFi is a financial system built on blockchain technology that operates without traditional financial intermediaries like banks, brokers, or exchanges. It uses smart contracts to create financial instruments and services.
Key Principles
Decentralization
No single entity controls the system. Decisions are made through consensus mechanisms.
Transparency
All transactions and smart contract code are publicly verifiable on the blockchain.
Permissionless
Anyone can access DeFi services without approval from centralized authorities.
Interoperability
Different DeFi protocols can work together to create complex financial products.
Common DeFi Services
Decentralized Exchanges (DEXs)
Trade tokens directly with other users without intermediaries
Lending & Borrowing
Earn interest on deposits or borrow against collateral
Yield Farming
Provide liquidity to earn rewards and trading fees
Insurance
Protect against smart contract risks and protocol failures
Liquidity and Automated Market Makers (AMMs)
Liquidity is the lifeblood of DeFi. Automated Market Makers (AMMs) use mathematical formulas to determine token prices based on supply and demand in liquidity pools.
How AMMs Work
Liquidity Providers
Users deposit token pairs into pools to earn trading fees
Price Discovery
AMM algorithms automatically calculate token prices based on pool ratios
Trading
Users swap tokens directly with the pool, paying fees to liquidity providers
Risks and Considerations
Smart Contract Risk
Bugs in smart contracts can lead to loss of funds. Always use audited protocols.
Impermanent Loss
Providing liquidity can result in losses if token prices change significantly.
Market Risk
Cryptocurrency markets are highly volatile and can experience rapid price changes.
Regulatory Risk
DeFi regulations are still evolving and may impact protocol operations.
