Understanding Decentralized Finance
Key Learning Objectives:
- Understand the fundamentals of decentralized finance (DeFi)
- Learn about lending, borrowing, and yield farming protocols
- Explore automated market makers (AMMs) and DEXs
- Understand DeFi risks and security considerations
What is DeFi?
Decentralized Finance (DeFi) is a financial system built on blockchain technology that operates without traditional intermediaries like banks. It enables peer-to-peer financial services through smart contracts.
Key Concept: Permissionless Finance
DeFi eliminates barriers to financial services - anyone with an internet connection can access lending, borrowing, trading, and other financial products without permission or identification.
Core DeFi Protocols
DeFi consists of several key protocol types that work together to create a complete financial ecosystem:
Lending Protocols
Platforms like Aave and Compound that allow users to lend and borrow crypto assets
DEXs (Decentralized Exchanges)
Platforms like Uniswap and SushiSwap for trading tokens without intermediaries
Yield Farming
Strategies to earn rewards by providing liquidity to DeFi protocols
Stablecoins
Cryptocurrencies pegged to stable assets like the US dollar
Automated Market Makers (AMMs)
AMMs are the backbone of decentralized exchanges, using mathematical formulas to determine token prices and facilitate trading without traditional order books.
Interactive Demo: AMM Trading
See how automated market makers calculate prices and execute trades:
📈 Interactive AMM trading visualization will be implemented here
Students will see price impact, slippage, and liquidity pool dynamics
Lending and Borrowing
DeFi lending protocols allow users to earn interest on their crypto assets or borrow against them as collateral.
Traditional vs DeFi Lending
| Aspect | Traditional Banking | DeFi Lending |
|---|---|---|
| Credit Checks | Required | None (collateral-based) |
| Interest Rates | Set by banks | Algorithmically determined |
| Access | Geographic restrictions | Global access |
| Transparency | Limited | Fully transparent |
Yield Farming and Liquidity Mining
Yield farming involves providing liquidity to DeFi protocols in exchange for rewards, often in the form of governance tokens.
Real-World Example: Compound
Compound is a lending protocol where users can earn interest by supplying assets or borrow against their collateral. Interest rates adjust automatically based on supply and demand.
DeFi Risks and Security
While DeFi offers many advantages, it also comes with unique risks that users must understand:
Smart Contract Risk
Bugs or vulnerabilities in smart contracts can lead to fund loss
Impermanent Loss
Liquidity providers may lose value due to price volatility
Oracle Risk
Incorrect price feeds can cause protocol failures
Regulatory Risk
Changing regulations may impact DeFi protocols
Lesson Quiz
Test your understanding of DeFi fundamentals.
DeFi Fundamentals Quiz
Additional Resources
Deepen your understanding of DeFi.
💻 Interactive Exercises
Practice using DeFi protocols and understanding yield strategies
Start ExercisesNext Steps
After completing this lesson, you'll be ready to explore blockchain security.