Cryptointermediate

What is DeFi?

Lending, swaps, yield — without intermediaries.

TL;DR

DeFi — decentralised finance — replaces banks and exchanges with open-source smart contracts. You can lend, borrow, swap, and earn yield without an account, intermediary, or permission.

The core idea

Every traditional financial primitive — savings, loans, exchanges, derivatives, insurance — has a DeFi equivalent built on smart contracts. Code replaces counterparty trust. Your wallet is your identity; your private key is your password.

The DeFi stack

Major categories with examples.

→DEXs (decentralised exchanges): Uniswap, Curve — swap tokens without an order book
→Lending: Aave, Compound — overcollateralised loans, algorithmic interest rates
→Stablecoins: DAI (decentralised), USDC (centralised) — dollar-pegged units of account
→Liquid staking: Lido, Rocket Pool — stake ETH and stay liquid
→Yield aggregators: Yearn — auto-rebalance across protocols for the best yield
→Derivatives: GMX, dYdX — perpetual futures on-chain

TVL — Total Value Locked

DeFi's headline metric: the dollar value of crypto deposited in smart contracts. Higher TVL signals more economic activity. As of recent cycles, Ethereum dominates TVL, followed by Solana, Arbitrum, and Base.

Worked example

Overcollateralised borrowing on Aave

You have $10,000 of ETH and want a dollar loan without selling.

1Deposit$10,000 ETH into Aave
2Collateral factor82.5% (Aave parameter)
3Maximum borrow$10,000 × 82.5% = $8,250 USDC
4Liquidation threshold86%
5RiskIf ETH drops and your loan-to-value crosses 86%, your collateral is liquidated

Takeaway

DeFi lending lets you access dollar liquidity without selling crypto — at the cost of constant liquidation risk if prices fall.

Common mistakes

What to avoid

!Treating DeFi yields as 'risk-free' — smart contract bugs, peg breaks, and liquidations are constant risks
!Approving unlimited spend allowances to unverified contracts
!Chasing 1000% APY pools — they're almost always inflation tokens, not real yield
!Borrowing right up to the liquidation threshold — leave a buffer
!Forgetting taxes — most jurisdictions treat DeFi yield and swaps as taxable events

Self-check

Test yourself

Q1What does TVL stand for?+

Total Value Locked — the dollar value of assets deposited in DeFi protocols.

Q2Why are DeFi loans usually overcollateralised?+

There's no credit check; the protocol enforces solvency by requiring more collateral than the loan amount.

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