A Beginner’s Guide to Decentralized Finance (DeFi)
DeFi is a financial services system that operates on public blockchains and uses smart contracts to provide lending, trading, liquidity, and staking functions. It is generally open and transparent, but users must manage their own assets and bear risks including code vulnerabilities, forced liquidation, impermanent loss, fraud, and regulatory changes.
Fundamental Principles of DeFi
DeFi is built on public blockchains and smart contracts. Protocols encode transaction conditions and execution rules in code and run automatically when those conditions are met, so institutions such as banks and brokers are generally not required to process or approve them. As long as users have a compatible wallet and an internet connection, they can interact directly with protocols.
Common Applications and How They Work
Key DeFi applications include collateralized lending, decentralized trading, liquidity mining, liquid staking, and the tokenization of real-world assets. Some trading platforms use automated market makers and liquidity pools to facilitate trades; returns generated by protocols may come from borrowing interest, trading fees, network rewards, or token incentives.
Risks to Understand Before Participating
DeFi funds are generally not protected by traditional deposit insurance. Smart contracts may contain vulnerabilities, declines in the value of collateral may trigger forced liquidation, and providing assets to liquidity pools may also result in impermanent loss. Open deployment also leaves room for fraudulent protocols, so code audits cannot replace risk assessment and due diligence.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/defi
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