Traditional finance requires trust in centralised institutions. DeFi replaces trust with code:

| Traditional Finance | DeFi | |---|---| | Bank holds your deposits | Smart contract holds funds | | Loan approved by credit check | Loan issued against collateral | | Trading through brokers | Trading directly on DEXes | | 1-3 day settlement | Instant settlement | | Interest set by banks | Interest set by supply and demand | | Access requires documentation | Access requires a wallet |

DEXes let you swap tokens directly with other users through liquidity pools - no order books, no matching engine, no middleman.

Automated Market Makers use a mathematical formula instead of order books:

Constant product formula: x * y = k

x = amount of Token A in pool
y = amount of Token B in pool
k = constant

When you buy Token A, you add Token B to the pool and remove Token A. The formula adjusts the price automatically based on the new ratio.

| Protocol | Chain | Feature | |---|---|---| | Uniswap | Ethereum, L2s | Largest AMM, v3 concentrated liquidity | | PancakeSwap | BNB Chain | Lower fees, gamified features | | Curve | Ethereum, L2s | Optimised for stable swaps | | Jupiter | Solana | Aggregator + DEX with best routing | | Raydium | Solana | Hybrid AMM + order book |

Lending protocols let you:

• Earn yield by depositing assets that others can borrow
• Borrow assets by depositing collateral (typically overcollateralised)

1. Deposit 1 ETH as collateral into Aave
2. Borrow up to ~70% of your collateral value in USDC
3. Repay USDC + interest to reclaim your ETH
4. If ETH price drops too far, your position gets liquidated

| Protocol | Collateral Required | Notable Feature | |---|---|---| | Aave | Yes (overcollateralised) | Flash loans, multiple chains | | Compound | Yes | Algorithmic interest rates | | Morpho | Yes | Peer-to-peer matching layer | | Spark (MakerDAO) | Yes | DAI-focused lending |

NOTE

Key Risk: Liquidation. If your collateral value drops below the required ratio, your position can be liquidated at a discount, and you lose part of your collateral.

Yield farming involves providing liquidity to protocols in exchange for rewards - typically a share of trading fees plus governance tokens.

1. Deposit equal value of two tokens (e.g. ETH + USDC) into a Uniswap LP
2. Receive LP tokens representing your share of the pool
3. Earn a percentage of every swap that uses your liquidity
4. Optionally stake LP tokens on a farm for extra rewards

• Impermanent loss: When token prices diverge, your LP position may be worth less than simply holding
• Smart contract risk: Bugs or exploits can drain the pool
• Token devaluation: Farm rewards tokens can drop sharply in value

Ethereum requires 32 ETH to run a validator. Liquid staking protocols pool funds so anyone can stake any amount.

How it works:

1. Deposit ETH into Lido or Rocket Pool
2. Receive a liquid staking token (stETH, rETH)
3. Your stETH earns staking rewards (~3-5% APY)
4. You can use stETH in other DeFi protocols while still earning yield

| Protocol | LST Token | Notable Feature | |---|---|---| | Lido | stETH | Largest, most liquid | | Rocket Pool | rETH | Fully decentralised | | Frax | sfrxETH | Higher yield via Frax ecosystem |

Stablecoins are tokens designed to maintain a stable value (typically $1). They are the backbone of DeFi.

| Type | Example | How It Works | |---|---|---| | Fiat-backed | USDC, USDT | Backed 1:1 by USD reserves | | Crypto-backed | DAI | Overcollateralised by ETH/USDC | | Algorithmic | FRAX | Partially collateralised + algorithm |

1. Fund a wallet with ETH and a stablecoin (USDC)
2. Try a simple swap on Uniswap (e.g. USDC to ETH)
3. Deposit into Aave to earn lending yield
4. Explore liquidity pools with small amounts
5. Track your positions using DeBank or Zapper

NOTE

Beginner Rule: Start with stablecoin pools first. They have minimal impermanent loss and let you learn the mechanics safely.

| Tool | Purpose | |---|---| | DeBank / Zapper | Portfolio tracker across all protocols | | DefiLlama | Protocol TVL and metrics | | Revoke.cash | Manage token approvals | | DexScreener | Real-time DEX trading data | | Etherscan | Transaction explorer and contract verification |

DeFi is permissionless, global, and open 24/7. But with great power comes great responsibility - always DYOR before depositing funds into any protocol.