DeFi Landscape
The decentralized finance ecosystem and its major sectors
What is DeFi?
Decentralized Finance (DeFi) recreates traditional financial services using smart contracts instead of banks and brokers. Trade, lend, borrow, and earn interest without intermediaries.
DeFi operates 24/7, is accessible globally, and is transparent— anyone can inspect the code and verify what's happening. But this openness comes with complexity and risk.
Major DeFi Sectors
Decentralized Exchanges (DEXs): Swap tokens without a centralized order book. Uniswap, Curve, and others use liquidity pools and automated market makers.
Lending/Borrowing: Deposit crypto to earn interest; borrow against collateral. Aave and Compound are major protocols. Over-collateralization required.
Stablecoins: Price-stable tokens essential for DeFi. USDC (centralized reserves), DAI (crypto-collateralized), and others serve as DeFi's base currency.
Derivatives: Perpetual futures, options, and synthetic assets. More complex and higher risk. dYdX and GMX are examples.
Yield Aggregators: Automatically move funds between protocols to maximize returns. Yearn Finance pioneered this category.
How DeFi Works
Liquidity pools: Users deposit token pairs into pools. Traders swap against these pools, paying fees that go to liquidity providers.
Composability: DeFi protocols can interact with each other—"money legos." This enables complex strategies but also cascading risks.
Governance tokens: Many protocols have tokens that grant voting rights on protocol changes and sometimes revenue sharing.
TVL and Metrics
Total Value Locked (TVL): The amount of assets deposited in a protocol. A common but imperfect measure of adoption and trust.
APY/APR: Annual percentage yield/rate. High yields often indicate high risk—understand where the yield comes from before chasing it.
Why DeFi Matters
- Enables financial services without traditional gatekeepers
- Global access—anyone with internet can participate
- Transparency—code is open, transactions are verifiable
- Innovation happens faster without institutional bureaucracy
DeFi Risks
- •Smart contract bugs can drain funds instantly and permanently
- •Impermanent loss for liquidity providers
- •Oracle manipulation attacks
- •Regulatory uncertainty—may face restrictions
- •Complexity makes it easy to make costly mistakes
- •High yields often mask high risks
Key Takeaways
- DeFi uses smart contracts to provide financial services
- Major sectors: DEXs, lending, stablecoins, derivatives, yield aggregators
- Liquidity pools and composability are foundational concepts
- TVL measures adoption but doesn't indicate safety
- Start small—DeFi rewards understanding and punishes mistakes