DeFi: Banking Without Banks

What DeFi replaces

Every financial service you use through a bank can be rebuilt with smart contracts. The difference: no company, no office hours, no credit checks, no geographic restrictions.

The DeFi stack

DeFi is not one product. It is layers of protocols that work together, like Lego bricks.

DEXs (Decentralized Exchanges)

Trade tokens without a centralized exchange. Uniswap is the largest. Instead of matching buyers with sellers (like the stock market), it uses liquidity pools — pots of tokens deposited by users.

When you swap ETH for USDC, you are trading against a pool, not a person. The price is set by a formula based on the ratio of tokens in the pool. The more you buy, the more the price moves.

Lending and borrowing

Deposit crypto to earn interest. Borrow crypto by posting collateral.

On Aave, you can deposit USDC and earn 3-8% APY. Or you can deposit ETH as collateral and borrow USDC against it. If ETH's price drops and your collateral ratio falls below the minimum (typically 80%), the contract liquidates your position.

Yield

"Yield" is the return you earn on deposited crypto. Sources include:

Lending interest: Earn interest by lending to borrowers
Liquidity providing: Earn trading fees by depositing into DEX pools
Staking: Earn rewards for validating transactions (Ethereum PoS yields ~3-4% APY)

The real numbers

Protocol	Category	TVL	What it does
Lido	Staking	~$25B	Liquid ETH staking
Aave	Lending	~$15B	Borrow and lend crypto
Uniswap	DEX	~$5B	Token swaps
Maker	Stablecoin	~$8B	DAI stablecoin creation
Curve	DEX	~$2B	Stablecoin swaps (low slippage)

The risks

DeFi gives you access to financial tools without a middleman, but it also gives you full responsibility:

Smart contract risk: Bugs in code can be exploited. Billions have been lost.
Liquidation risk: If collateral drops in value, your position gets automatically sold.
Impermanent loss: Liquidity providers can lose money if token prices move significantly.
Scams: Fake protocols exist specifically to steal funds. Verify contracts before depositing.

Key takeaways

DeFi rebuilds banking (trading, lending, saving) using smart contracts — open 24/7, no KYC, global.
DEXs use liquidity pools and formulas instead of order books.
Lending requires over-collateralization — deposit more than you borrow.
DeFi gives access but also responsibility — bugs, liquidations, and scams are real risks.