Intro to DeFi – How to navigate the Degen world

DeFi is one of the key areas in web3: the guide introduces the concept and provides resources for using and developing DeFi applications.

What is DeFi?

Decentralised Finance (DeFi) is a term for web3 applications in the financial sector. They replicate the services of traditional financial service providers on a decentralised infrastructure, allowing permissionless access.

They thus promise access to financial services without the need for a bank account or verification by a central provider, leading to greater financial inclusion. On the other hand, most of the volume is currently created by experienced DeFi users. Some individuals are even creating scam DApps, so be careful.

DeFi is one of the main use cases of web3. Especially during the so-called "DeFi Summer" in 2020, there was an explosion in the use and popularity of DeFi applications. Most of the DeFi market is on Ethereum, but many applications are now on multiple chains. These typically allow for lower transaction costs.

If you want to contribute to the guide, have a look on Github.

Some of the characteristics of DeFi:

  • Permissionless: Use your wallet instead of a bank account. Thanks to the peer-to-peer structure, there is no centralized entity that controls decision-making. However, your funds are your own responsibility.
  • Global: It doesn’t matter where you are, DeFi is a global phenomenon.
  • Fast: Transactions are finished rapidly compared to bank transfers, especially for cross-border transfers.
  • Pseudonymous: People act through their wallet addresses, no personal information needed.
  • Transparent: Transactions are public, though, and often the code of the applications is open-source.

DeFi essentially extends the "digital money" premise of bitcoin beyond simply making payments with digital currency. DeFi applications allow you to trade crypto, create derivatives, borrow and lend, earn interest or buy insurance. In the next section, we will explain the broader areas of DeFi.

Some intro pages and learning resources to start your DeFi journey:

Areas of DeFi

DeFi applications are designed to do the same things as traditional financial service providers. As a result, there is a wide variety of DApps that qualify as such. In fact, some use cases are only created thanks to the nature of smart contracts.

  • Payments: low-cost (cross-border) transactions with crypto, e.g. using stablecoins
  • Swapping (DEXes): “Decentralized Exchanges” allow for trading of digital assets, e.g. Uniswap
  • Bridging: Similar to DEXes, but among multiple chains (cross-chain transfers), e.g. HOP
  • Lending and borrowing: Get a loan or earn interest for providing your tokens, e.g. AAVE
  • Decentralized staking: Participate in the consensus of proof-of-stake protocols and earn interest, e.g. Rocketpool
  • Derivatives: Trade or create options, futures or other synthetics assets, e.g. Synthetix
  • Insurance: Buy coverage for risks with automated claims, e.g. Nexus Mutual
  • Fundraising / grants: Collect funds for your project by a decentralized crowd or get distributed a grant, e.g. Juicebox
  • Bets / prediction markets: Create bets with tokens and forecast future events

There are many other DeFi application areas, and some that are still unexplored. To dive deeper, you can check out DeFi DApps and metrics on these websites:

Some DeFi use cases are just waiting for someone to build them! DeFi applications can be a great playground, whether you're a new developer getting your hands dirty for the first time, or a seasoned developer making the transition to the web3 space.

There are different areas for developers within DeFi: you can specialize in writing smart contracts for DeFi, researching the dynamics of a DApp, or building user-friendly interfaces for interacting with them. As DeFi DApps often deal with a lot of capital, they require strong security measures, hence developers specializing in DeFi security.

You can find a lot of DeFi DApps tutorials on useweb3. Check them out here:

DeFi Security

One of the biggest risks in DeFi is the loss of funds due to hacks and other security issues. In recent years, there have been hacks that have drained up to $600 million from DeFi applications. Therefore, becoming a DeFi security specialist can be a promising career path.

Security breaches, such as hacks or exploits, can result in significant financial losses for users and damage to the platform's reputation. By focusing on DeFi security, you can help mitigate these risks and protect users' assets.

Learn more about DeFi hacks and how to prevent them:

Degen Glossary

When you’re new to DeFi, you will probably encounter some specific vocabulary. We have summarized the most important terms for you. Find more terms about web3 in general in the crypto glossary.

  • APR / APY:
    Annual Percentage Rate / Annual Percentage Yield, measures the interest or yield earned over a year

  • Aggregators:
    Platforms that bundle multiple sources for optimal trade execution, e.g., DEX aggregators

  • Arbitrage:
    Term to describe the exploiting of price differences for profit across different markets

  • ATH:
    All-Time High, the highest price an asset has ever reached

  • Bonding Curve:
    Formula for determining the price of assets in a decentralized exchange

  • CDP:
    Collateralized Debt Position, a system for creating crypto-collateralized stablecoins, first created by Maker for the DAI stablecoin

  • Collateral:
    Assets pledged to secure loans in DeFi protocols

  • Degen:
    Degenerate, term for a person that is deeply involved in DeFi or another sector

  • Flash Loan:
    Taking out an uncollateralized loan and repaying it immediately, typically within a single transaction, e.g. to exploit arbitrage opportunities

  • Frontrunning:
    Type of MEV, prioritizing one's own transactions to profit from others' trades

  • Impermanent Loss:
    Loss experienced by liquidity providers due to volatility of the underlying assets

  • Liquidity Mining / Yield Farming:
    Systematically provide liquidity to DeFi protocols to earn interest, often in multiple layers

  • Liquidity Pools:
    Pools of crypto assets used for decentralized liquidity provisioning on platforms like DEXes

  • LP Token:
    Liquidity Provider Tokens represent ownership in a liquidity pool, usually in a DEX, they can be redeemed for their stake in the pool plus the fees earned

  • MEV:
    Maximal Extractable Value, the profit miners or validators can make by including, excluding or reordering transactions, sometimes called “invisible tax”

  • Pump and Dump:
    Coordinated market manipulation to inflate and then sell off tokens

  • Rebalancing:
    Adjusting portfolio allocations to maintain the desired strategy, e.g., rebalancing positions according to market capitalization

  • Rug Pull:
    Scenario in which a team abandons a project and/or removes its liquidity, similar to exit scams

  • Sandwich attack:
    An exploitative trading strategy where an attacker sandwiches a swap between two transactions to make a profit

  • Slippage:
    Price difference between the expected and actual execution price of a trade

  • Stablecoin:
    A cryptocurrency that is pegged to another asset, mostly USD

  • Synthetic Assets:
    Financial instruments that synthetically replicate a certain strategy, including real-world assets or other cryptocurrencies, e.g., leveraged ETH

  • TVL:
    Total Value Locked, equivalent of USD locked in a blockchain or protocol, often used as an indicator in DeFi, e.g., in lending protocols

  • TVL Ratio:
    Ratio of a protocol's Total Value Locked to its market capitalization, an indicator to evaluate the valuation of a protocol