What is DeFi, and how does decentralized finance work?
Decentralized finance is the name for financial services built as smart contracts on a public blockchain rather than as products offered by a company. Lending, trading and market-making are performed by code that anyone can inspect and use, with the assets supplied by users rather than by a bank. That removes the intermediary and the account-opening process, and it replaces the protections an intermediary provides with the risk that the code itself is flawed or exploited.
The pages below explain the mechanisms that most DeFi products are assembled from, including how a liquidity pool sets a price, what yield farming actually pays out, and why supplying a pool can leave you with less value than simply holding the assets. That last effect, impermanent loss, is the one most often left out of promotional material.
DeFi terms explained
18 definitions, each with a plain-English version, a technical version, a worked example and the mistakes beginners make.
- APR (Annual Percentage Rate)
- APY (Annual Percentage Yield)
- Automated Market Maker (AMM)
- Collateral
- DAO (Decentralized Autonomous Organization)
- DeFi (Decentralized Finance)
- Flash Loan
- Governance Token
- Impermanent Loss
- Lending Protocol
- Liquid Staking
- Liquidity Pool
- Oracle
- Over-Collateralization
- Restaking
- Total Value Locked (TVL)
- Wrapped Token
- Yield Farming
Where this is taught
This subject sits in the Intermediate path of the CryptoBipto curriculum, which runs from complete beginner to expert across four tiers. You can browse the full curriculum or read free sample lessons before signing up.
Common questions
Is DeFi safer than using a centralised exchange?
It is differently risky. DeFi removes the risk that a company fails or freezes your account, and it adds the risk that a smart contract contains a bug, that you approve a malicious transaction, or that there is nobody to appeal to when something goes wrong.
What is impermanent loss in simple terms?
When you supply two assets to a liquidity pool and their prices move apart, the pool rebalances your share toward the one that fell. If you withdraw at that point, you hold less value than if you had simply kept both assets, and the fees you earned may or may not cover the difference.
What does a governance token actually let me do?
It usually lets you vote on proposals that change how a protocol operates, such as fees or supported assets. It is not an ownership share in a company and it does not entitle you to profits unless the protocol has specifically been designed that way.
Related subjects
Educational only — not financial advice. CryptoBipto does not custody funds or execute trades.