Access: Traditional finance requires ID verification, credit checks, and bank accounts. DeFi only needs an internet connection and a wallet—anyone in the world can participate.

Operating Hours: Banks close on weekends and holidays. DeFi operates 24/7/365, including during market crashes when traditional markets halt trading.

Transparency: You can't see what your bank does with your deposits. Every DeFi transaction is recorded on a public blockchain—you can verify exactly where your funds are.

Speed: International wire transfers take 3-5 business days. DeFi transfers settle in seconds to minutes.

Yield: Savings accounts pay 0.01-4% APY. DeFi lending protocols routinely offer 3-15% APY on stablecoins.

DeFi creates earning opportunities that simply don't exist in traditional finance:

• Liquidity Provision: Earn trading fees by providing liquidity to DEXs
• Lending: Earn interest by lending your crypto assets
• Yield Farming: Maximize returns by strategically moving assets between protocols
• Arbitrage: Profit from price differences between platforms
• Liquidations: Earn rewards by helping maintain protocol health

Liquidity is the lifeblood of DeFi. A liquid market means you can buy or sell an asset quickly without significantly affecting its price.

In traditional exchanges, liquidity comes from order books—buyers and sellers posting their desired prices. DeFi introduced a revolutionary alternative: Automated Market Makers (AMMs).

Instead of matching buyers and sellers, AMMs use liquidity pools—smart contracts holding pairs of tokens. Anyone can become a liquidity provider (LP) by depositing tokens, earning a share of trading fees in return.

The most common AMM formula is the constant product: x × y = k

Where x and y are the quantities of two tokens in the pool, and k is a constant. When someone trades, they add one token and remove another, but k must remain unchanged (minus fees).

Example: A pool has 10 ETH and 30,000 USDC (k = 300,000). Someone wants to buy 1 ETH. The pool must maintain k = 300,000, so after the trade: 9 ETH × 33,333 USDC = 300,000. The trader pays ~3,333 USDC for 1 ETH.

This is why larger trades have worse prices (more slippage)—they move the price curve more.

DeFi lending works differently than traditional loans. Instead of credit checks, DeFi uses overcollateralization—you must deposit more value than you borrow.

Why would anyone take an overcollateralized loan?

• Access liquidity without selling your crypto (avoiding capital gains tax)
• Leverage your position (borrow stablecoins to buy more crypto)
• Short-selling strategies
• Arbitrage opportunities

The ratio of collateral to debt is called the Loan-to-Value (LTV) ratio. If the collateral value drops below a threshold, the position gets liquidated—partially sold to repay the debt.

Stablecoins are cryptocurrencies designed to maintain a stable value, typically $1 USD. They're essential for DeFi because they provide a stable unit of account without leaving the crypto ecosystem.

Types of Stablecoins:

• Fiat-backed (USDC, USDT): Each token is backed by $1 in a bank account
• Crypto-collateralized (DAI): Backed by overcollateralized crypto deposits
• Algorithmic (FRAX): Use algorithms to maintain the peg

Most DeFi yield opportunities involve stablecoins, as they let you earn returns without crypto price volatility.

Step 1: Set up a wallet (MetaMask recommended for beginners)

Step 2: Get some ETH for gas fees (buy on an exchange, then withdraw to your wallet)

Step 3: Visit a DEX like Uniswap

Step 4: Connect your wallet and approve the connection

Step 5: Select the tokens you want to swap

Step 6: Review the swap details (slippage, gas fees, output amount)

Step 7: Confirm the transaction in your wallet

Important: Always verify you're on the official website. Scammers create fake sites that steal your funds.

After you're comfortable with swaps, try earning yield on your assets:

Step 1: Visit a lending protocol like Aave

Step 2: Click 'Supply' on the asset you want to deposit

Step 3: Approve the token (one-time transaction per token)

Step 4: Confirm the deposit amount

You'll immediately start earning interest. The APY fluctuates based on supply and demand—when more people want to borrow, rates go up.

Gas fees are the cost of using the blockchain. They can range from $1 to $100+ on Ethereum during congestion.

• Time your transactions: Gas is cheapest on weekends and late at night (US time)
• Use L2s: Layer 2 networks like Arbitrum and Optimism have fees 10-100x lower
• Batch transactions: Some protocols let you combine multiple actions
• Set appropriate gas limits: Too low = failed transaction (you still pay). Too high = wasted money

Yield farming means strategically deploying your assets to maximize returns. The simplest form is depositing assets in lending protocols, but it can get much more complex.

Basic Strategy (Stablecoin Yield):

1. Deposit USDC into Aave → Earn 3-5% APY
2. Receive aUSDC as your deposit receipt
3. Stake aUSDC in additional protocols for extra rewards

Intermediate Strategy (Curve LP):

1. Provide stablecoin liquidity to Curve
2. Earn trading fees + CRV rewards
3. Stake your LP tokens in Convex for boosted yields
4. Combined APY: 5-15%

Yield aggregators like Yearn automate these strategies, automatically compounding your returns.

As a liquidity provider, you earn a share of trading fees. On Uniswap V3, LPs earn 0.3% of every trade in their price range.

The catch: Impermanent Loss (IL). When prices change, you end up with more of the token that dropped in value. For volatile pairs, IL can exceed fee earnings.

Minimizing IL:

• Provide liquidity to stablecoin pairs (USDC/USDT has minimal IL)
• Choose correlated pairs (ETH/stETH move together)
• Use wider price ranges on V3 (more fees captured, less IL)

The safest DeFi yield strategy: deposit assets and earn interest from borrowers.

Current rates (typical ranges):

• Stablecoins (USDC, DAI): 3-8% APY
• ETH: 2-5% APY
• BTC (WBTC): 1-3% APY

Rates vary by platform and market conditions. During high demand for borrowing (bull markets), rates spike. During quiet periods, they drop.

Risk factors:

• Smart contract risk (protocol gets hacked)
• Liquidation cascade risk (extreme market moves)
• Platform solvency (centralized elements fail)

Flash loans are one of DeFi's most mind-bending innovations. You can borrow millions of dollars with zero collateral—as long as you repay it in the same transaction.

How is this possible? The blockchain transaction either completes fully or reverts entirely. If you can't repay, it's like the loan never happened.

Common flash loan uses:

• Arbitrage: Borrow → Buy cheap on Exchange A → Sell high on Exchange B → Repay + keep profit
• Collateral swaps: Swap your collateral type without closing your position
• Self-liquidation: Close a risky position without getting liquidation penalties

Arbitrage is profiting from price differences between markets. In DeFi, prices on different DEXs can diverge, creating opportunities.

Simple arbitrage example:

• ETH is $2,000 on Uniswap
• ETH is $2,010 on SushiSwap
• Buy on Uniswap, sell on SushiSwap, profit $10 per ETH (minus gas)

Reality check: Pure arbitrage is extremely competitive. Professional arbitrageurs use sophisticated bots and pay high gas fees to front-run competitors. For retail traders, the opportunities are often too small to be profitable after gas.

Most profitable for retail: Cross-chain arbitrage (less competition) and longer-term price inefficiencies rather than instant arbitrage.

When borrowers' collateral falls below required levels, their positions can be liquidated. Liquidators repay part of the debt and receive collateral at a discount (typically 5-10%).

How it works:

1. Monitor lending protocols for undercollateralized positions
2. When a position's health factor drops below 1.0, it's liquidatable
3. Call the liquidation function, repaying debt with your funds
4. Receive discounted collateral (your profit)

This is competitive—most liquidations are captured by sophisticated bots. But during extreme market crashes, opportunities arise faster than bots can process them.

MEV refers to the value that can be extracted by reordering, inserting, or censoring transactions within a block. This is the dark art of DeFi—highly technical but important to understand.

Types of MEV:

• Front-running: Seeing a large buy order, buying first, then selling after
• Back-running: Placing a trade immediately after a large order
• Sandwich attacks: Front-run + back-run combined

MEV extraction requires deep technical knowledge and is dominated by specialized firms. As a regular user, your goal is to avoid being extracted from by using MEV-protected services.

Every DeFi protocol is only as secure as its smart contracts. Even audited protocols can have vulnerabilities.

Major DeFi hacks:

• Ronin Bridge: $624M (2022)
• Wormhole: $326M (2022)
• Nomad Bridge: $190M (2022)

Mitigation:

• Use established protocols with long track records
• Diversify across multiple protocols
• Start with small amounts
• Check for audits (but don't rely solely on them)

Impermanent Loss affects liquidity providers when token prices change. The name is misleading—it becomes permanent when you withdraw.

IL Formula for 50/50 pools:

IL = 2 × √(price_ratio) / (1 + price_ratio) - 1

IL by price change:

• 1.5x price change: 2.0% IL
• 2x price change: 5.7% IL
• 3x price change: 13.4% IL
• 5x price change: 25.5% IL

IL is offset by trading fees. For high-volume pairs, fees often exceed IL. For low-volume or volatile pairs, IL usually wins.

A rug pull occurs when project creators drain user funds and disappear. This is common in new, unvetted projects.

Warning signs:

• Anonymous team
• No audit
• Unrealistic APYs (1000%+ is almost always unsustainable)
• Locked liquidity that can be unlocked by team
• Heavy social media promotion, light on technical details

Before using any DeFi protocol, verify:

1. Team: Are they public? What's their track record?
2. Audits: Has the code been audited? By whom?
3. TVL: How much value is locked? More TVL = more confidence
4. Time: How long has the protocol been running without issues?
5. Code: Is it open source? Verified on Etherscan?

Use DefiLlama to check TVL and protocol stats. Use Etherscan to verify contracts. Never trust, always verify.