How DeFi Is by the CoinGecko team is a guide to understanding decentralized finance (DeFi) .
In recent years, the financial world has been undergoing a revolution caused by the emergence of decentralized finance (DeFi) . This term encompasses a new generation of financial instruments built on the blockchain that allow people to make payments, get loans, invest and insure themselves without the involvement of banks and other traditional intermediaries. DeFi is a financial system without borders, censorship and centralized regulators .
serves as a guide to the world of decentralized finance . It is designed for beginners who want to understand the concept of DeFi, how to use the different protocols, and what opportunities this technology opens up .
1. DeFi is a new model of financial services . There is no longer a need for intermediaries: banks, insurance companies and exchanges. All transactions occur through smart contracts – automated programs running on the blockchain.
2. Financial freedom : Anyone with internet access can use DeFi , regardless of citizenship, credit history, or location.
3. Transparency and security . All operations in DeFi are open to the public , and key decisions are made by the user community .
4. DeFi risks . Despite the advantages, decentralized finance is not without problems – hacks, instability of smart contracts and high volatility of cryptocurrencies.
The authors have divided the book into four parts , each covering a specific aspect of DeFi :
- Part 1 – Comparison of Traditional Finance and DeFi.
- Part 2 – main elements of the ecosystem: Ethereum blockchain , smart contracts, crypto wallets.
- Part 3 – a detailed analysis of key DeFi products : exchanges, lending, insurance, payments.
- Part 4 – Real-life examples of DeFi use cases around the world.
The authors don’t just explain the theory, but also provide practical instructions that allow you to start using DeFi immediately after reading .
Part 1. Centralized and decentralized finance
Chapter 1. Traditional financial institutions
The financial system we know today is based on traditional banking institutions regulated by states. These institutions perform key functions :
- Servicing payments and transfers between clients.
- Issuance of loans and deposits .
- Storage and management of assets.
- Risk insurance and provision of financial guarantees.
However, traditional finance has many shortcomings that have made the emergence of alternative solutions such as DeFi possible.
1.1 Problems of the traditional financial system
📌 High fees and delays in payments
One of the main complaints about traditional banks is the slow processing of payments and high fees .
📌 Example: International transfers via SWIFT can take from 1 to 5 days , and fees for them sometimes exceed 5-10% of the amount.
In DeFi, transactions take place in seconds and rarely cost more than a few dollars .
📌 Unavailability of banking services
According to the World Bank , more than 1.7 billion people do not have access to banking services. Reasons:
- Lack of documents to open an account.
- Geographical remoteness (no bank branches).
- High minimum balance requirements.
There are no restrictions in DeFi – anyone with the Internet and a crypto wallet can use financial instruments.
📌 Centralization and corruption
Centralized banks can freeze a customer’s account without explanation. They can also be subject to manipulation and corruption .
📌 Example: In 2008 , Lehman Brothers went bankrupt, causing the global financial crisis. Millions of people lost their savings because they trusted the centralized system.
In DeFi, control over funds remains with users – no one can freeze a wallet or revoke a transaction .
1.2 How does DeFi solve these problems?
DeFi offers an alternative to traditional finance :
1. Automation – financial services operate on smart contracts , eliminating the need for intermediaries.
2. Accessibility – DeFi is open to everyone, without restrictions .
3. Decentralization – the system operates without central control .
4. Transparency – all data is recorded in the blockchain and available for verification.
📌 Example: In DeFi , transfers are made instantly . The average fee in the Ethereum network is $1-5 , and in the Solana network it is less than a cent .
Decentralized finance is a new financial ecosystem that runs on blockchain . Unlike traditional banks, which depend on governments, licenses, and regulators , DeFi operates autonomously .
2.1 The Main Principles of DeFi
1. Openness – anyone can participate without third party approval.
2. No intermediaries – transactions are carried out automatically, without banks.
3. Transparency – all information is stored in the blockchain and is publicly available.
4. Stability – DeFi operates without restrictions and interruptions .
DeFi consists of various services that replace traditional financial instruments:
📌 Stablecoins are cryptocurrencies tied to fiat money (for example, DAI, USDC, USDT ).
📌 Lending – protocols (e.g. Compound, Aave ) allow users to borrow and lend cryptocurrency.
📌 Exchanges (DEX) – decentralized exchanges ( Uniswap, Sushiswap ) allow you to exchange cryptocurrencies without intermediaries .
📌 Derivatives – instruments for trading futures and options (for example, Synthetix ).
📌 Insurance – protection of users’ funds from hacks and smart contract errors ( Nexus Mutual, Opyn ).
📌 Lotteries – unique winning mechanisms (for example, PoolTogether ).
Chapter 3. Ethereum Blockchain – The Foundation of DeFi
To understand how decentralized finance works, it is necessary to understand the Ethereum blockchain , which has become the basis of most DeFi applications .
Ethereum is a decentralized blockchain with support for smart contracts . Unlike Bitcoin , which is designed only for storing and transferring value, Ethereum allows the development of full-fledged decentralized applications (DApps) that operate without central servers .
Key features of Ethereum:
✅ Open network – anyone can deploy or use an application.
✅ Smart contracts – software codes that execute pre-set conditions.
✅ ETH – the internal currency of the network, required for transactions.
✅ Gas – a fee for executing smart contracts, paid in ETH.
📌 Example: If a user wants to exchange one token for another via Uniswap , they interact with a smart contract that automatically executes the transaction.
A smart contract is a program that runs on a blockchain network and performs financial transactions automatically .
A simple explanation of how a smart contract works:
1. If Alice sends 10 ETH to a certain address,
2. Then Bob will automatically receive 10,000 USDC in return.
💡 Feature: The smart contract code is open and unchangeable – no one can interfere with its operation.
Smart contracts power DeFi protocols like Uniswap, Aave, Compound , providing security, automation, and transparency .
3.3 What is ETH and why is it needed?
Ethereum runs on fuel called Gas , which is a fee that users pay to use the network.
- Transferring ETH from one wallet to another requires 21,000 gas .
- Swapping tokens via Uniswap may require 100,000 gas .
The higher the load on the network, the more expensive the gas . During periods of overload, fees can reach tens of dollars .
💡 Solution: In the future, Ethereum will move to Ethereum 2.0 , which will make the network faster and cheaper .
3.4 Decentralized Applications (DApps)
DApps are applications that run on Ethereum without a central server . Their code is stored on the blockchain and they cannot be shut down or blocked .
Examples of DApps:
✅ Uniswap – cryptocurrency exchange without intermediaries.
✅ Aave – cryptocurrency lending.
✅ Synthetix – issue of synthetic assets (analogs of stocks, oil, etc.).
- Transparency – anyone can check the code.
- Security – there is no central server that can be hacked.
- Automation – all operations are performed by code , not by people.
- High fees when the network is loaded.
- Errors in code can lead to vulnerabilities.
- The user is responsible for the safety of funds.
Chapter 4. Ethereum Wallets – The First Step into DeFi
To use DeFi applications , you need an Ethereum wallet . It allows you to:
✅ Store cryptocurrency (ETH, USDT, DAI and other tokens).
✅ Send and receive transfers.
✅ Connect to DeFi applications.
🔹 Custodial – managed by a centralized company (e.g., a wallet on the Binance exchange).
🔹 Non-custodial – users control their funds themselves (e.g., Metamask, Argent ).
💡 Conclusion: In DeFi , third parties cannot be trusted , so it is better to use non-custodial wallets .
📌 Example: If you store cryptocurrency on an exchange, you can lose funds if it is hacked. In a non-custodial wallet, only the owner has access to funds.
Metamask is a browser extension that allows you to interact with DeFi.
- Suitable for use on PC.
- Supports all Ethereum tokens.
- Compatible with all DeFi applications.
- Vulnerable to phishing and fraud.
- The user must protect the seed phrase himself.
📌 Step-by-step installation of Metamask:
1. Install the extension on Chrome, Firefox or Brave .
2. Create a new wallet and write down the seed phrase (this is the recovery key).
Argent is a convenient DeFi wallet for your smartphone.
- Free transactions (pays for gas instead of the user).
- Simple registration without seed phrases (uses the “Guardians” system).
- Built-in DeFi applications.
- There is no browser version.
- Supports Ethereum tokens only.
📌 How to create a wallet in Argent:
1. Install the application on your smartphone.
2. Choose a unique name (for example, @username.argent ).
3. Add friends’ phone numbers as “Guardians” to restore access.
The choice of wallet depends on your needs:
- If you need to connect to DeFi from a PC → Metamask.
- If you need a convenient mobile wallet → Argent.
- For long-term storage of cryptocurrencies → hardware wallets (Ledger, Trezor).
- Never share your seed phrase.
- Always make sure that you download the wallet from the official website.
- Keep your backups in a safe place.
Now you have the basic tools to enter the world of DeFi :
✅ Ethereum and smart contracts are the basis of decentralized finance.
✅ DeFi applications are tools for working with finances without intermediaries.
✅ Wallets are your personal access to the DeFi ecosystem.
Chapter 5. Decentralized Stablecoins
In the traditional financial system, most settlements and transactions are made in fiat currencies (dollars, euros, yuan). However, in the world of cryptocurrencies, the situation is more complicated: most digital assets are subject to high volatility . This makes them inconvenient for settlements and savings.
The solution is stablecoins . They are tied to stable assets (most often the US dollar) and allow users to avoid sharp price fluctuations .
Stablecoins are cryptocurrencies that have a fixed price , usually tied to the US dollar (1 stablecoin = 1 USD). They allow users to:
✅ Protect themselves from market volatility.
✅ Use cryptocurrency for payments.
✅ Store funds in the blockchain without price fluctuations.
Stablecoins fall into two key categories :
1. Centralized – backed by real money in bank accounts.
2. Decentralized – backed by cryptocurrency and managed by smart contracts.
This is the most common type of stablecoin . They are issued by companies that hold fiat money in accounts.
📌 Examples of centralized stablecoins:
- USDT (Tether) is the most popular, backed by US dollars (but there are questions about the transparency of reserves).
- USDC (USD Coin) – issued by Circle and Coinbase , fully backed by fiat money.
- BUSD (Binance USD) is a regulated stablecoin from the Binance exchange.
- High liquidity.
- Ease of use.
- Supported on most exchanges.
- Centralized management (the company can freeze funds).
- Reserves are not always transparent.
📌 Risk example:
In 2023, US regulators forced Paxos to stop issuing BUSD , which exposed the vulnerability of centralized stablecoins.
These stablecoins operate without trust in central organizations. Their issuance is controlled by smart contracts and their collateral consists of cryptocurrencies .
📌 Examples of decentralized stablecoins:
- DAI (MakerDAO) is backed by cryptocurrencies and its issuance is regulated by the community.
- sUSD (Synthetix USD) – supported by the synthetic asset system .
- Decentralization (no one can freeze accounts).
- Transparency (all data is open in the blockchain).
- Complex mechanism of operation.
- Vulnerability to strong market drops (eg TerraUSD crash in 2022).
1. The user locks ETH in the MakerDAO smart contract .
2. In return, he receives DAI .
3. To redeem your collateral, you need to return the DAI and pay a fee.
5.4 Why are stablecoins important for DeFi?
Stablecoins are the foundation of DeFi as they provide:
✅ Liquidity for exchanges and lending platforms.
✅ Volatility protection for users.
✅ A tool for settlements on the blockchain.
- On Uniswap, you can exchange ETH for USDC to lock in profits.
- Aave allows you to borrow DAI using your assets as collateral.
Chapter 6. Decentralized Lending and Borrowing
Lending is one of the most important elements of the financial system . In traditional banks, issuing a loan requires:
2. Approval of the application.
In DeFi, lending works differently – there are no intermediaries, bureaucracy, or checks.
6.1 How does DeFi lending work?
Users can:
✅ Contribute their assets to the protocol and earn interest.
✅ Take out loans secured by their crypto assets.
- You put 1000 USDC into Aave and earn 3% per annum .
- You stake 2 ETH in Compound and borrow 500 DAI .
Loans in DeFi are automated and work through smart contracts .
6.2 Major DeFi Lending Platforms
🔹 Aave is one of the largest DeFi protocols.
🔹 Compound allows you to earn interest and borrow.
🔹 MakerDAO is a system for issuing DAI.
1. You deposit ETH into the Aave smart contract.
2. In return you receive aTokens , which accrue interest.
3. You can take a loan in DAI, USDT or other currency .
- There is no identity check – anyone can take out a loan.
- Flexibility – you can come in and out at any time.
- Transparency – all data is visible on the blockchain.
- Mandatory deposit (usually 150%).
- Liquidation risk – if the value of the collateral falls, the loan may be liquidated.
- You took 1000 DAI with 2 ETH ($2000 each) as collateral.
- If the price of ETH drops to $1300, the system will sell your collateral and return the loan.
6.3 Flash Loans – Instant Loans in DeFi
Flash loans are a unique feature of DeFi. They allow you to borrow without collateral as long as it is repaid in the same transaction .
- Arbitrage is the purchase of an asset at a lower price on one exchange and its sale at a higher price on another.
- Liquidation – a loan to cover another user’s debt at a profit.
- No deposit required.
- Opportunity for instant profit.
- Requires technical knowledge.
- Can be used for attacks (eg price manipulation).
1. Stablecoins are the foundation of DeFi, making cryptocurrencies convenient for settlements.
2. DeFi lending allows you to earn passive income and borrow without intermediaries.
3. Flash loans are a unique tool available only on the blockchain.
Chapter 7. Decentralized Exchanges (DEX)
Cryptocurrency exchanges are a key tool for trading digital assets . However, centralized platforms like Binance or Coinbase have a number of disadvantages :
❌ Require identity verification (KYC) .
❌ Keep user funds in their vaults, making them a target for hackers.
❌ Can freeze assets at the request of authorities.
DeFi offers an alternative – decentralized exchanges (DEX) that allow users to exchange tokens directly , without intermediaries.
Decentralized exchanges (DEX) are trading platforms powered by blockchain where users can exchange cryptocurrencies without the involvement of third parties .
1. The user connects a non-custodial wallet (for example, Metamask).
2. Selects which tokens he wants to exchange.
3. The smart contract executes the transaction automatically , without the participation of the exchange.
- There are no intermediaries – users control their assets.
- Transparency – all transactions are recorded in the blockchain.
- Anonymity – no identity verification required.
- High fees in the Ethereum network (at loading times).
- Low liquidity compared to centralized exchanges.
- It is not possible to cancel a transaction once it has been submitted.
In DeFi, there are different mechanisms for how exchanges operate:
1️⃣ Order Book DEX – a traditional exchange model where users place buy and sell orders .
📌 Example: dYdX – a popular DEX for margin trading.
❌ Cons: requires high liquidity for trades to be completed quickly.
2️⃣ Automated Market Makers (AMM) – instead of orders, a liquidity pool is used , where transactions are carried out according to an algorithm.
📌 Examples: Uniswap, Sushiswap, PancakeSwap.
✅ Pros: the exchange is instant, liquidity is provided by users.
💡 Conclusion: Today, AMM DEX are the most popular , as they are convenient and do not require order books.
7.3 Uniswap – The Flagship of Decentralized Exchanges
Uniswap is the first and most popular AMM exchange in DeFi. It uses liquidity pools where users deposit assets and traders can swap them.
- Instead of orders, a mathematical formula is used :
x * y = k ,
where x is the quantity of one token, y is the quantity of the second token, and k is the constant product. - When a trader buys tokens from the pool, the price automatically changes .
- Anyone can add liquidity and earn commissions.
- Works 24/7, without failures and centralized control.
- Supports thousands of tokens.
- Sliding prices – large trades can cause the rate to change dramatically.
- Impermanent loss – liquidity providers can lose money due to volatility.
7.4 How do I add liquidity to Uniswap?
Users can contribute tokens to liquidity pools , earning interest on every trade.
1. Connect Metamask to Uniswap.
2. Select a pair of tokens (for example, ETH/DAI).
3. Contribute an equal amount of both assets.
4. Receive LP tokens that confirm participation in the pool.
5. Earn part of the commission from transactions.
💡 Important: Liquidity can be withdrawn at any time, but due to price changes, the balance may differ from the original.
7.5 PancakeSwap – Alternative on BNB Chain
If Ethereum fees are too high , you can use PancakeSwap , an analogue of Uniswap, but on the BNB Chain .
- Low fees (~$0.01 per trade).
- Fast transaction speed.
- Staking and farming functions.
- Limited choice of tokens compared to Ethereum.
- Requires the use of BNB to pay fees.
💡 Conclusion: If Uniswap is the #1 DeFi exchange on Ethereum , then PancakeSwap is the leader among DEX on BNB Chain .
Higher in Ethereum, lower in BNB Chain
- DEXs give more freedom but require knowledge of blockchain.
- CEX is beginner-friendly, but users lose control over their funds .
1. DEXs allow you to exchange tokens without intermediaries , but require a blockchain wallet.
2. Uniswap is the leading Ethereum platform that uses the AMM model .
3. PancakeSwap offers cheaper trades but operates on the BNB Chain network.
4. Liquidity providers can make money , but must take into account the risks of slippage and impermanent losses .
5. DEX and CEX have their pros and cons – the choice depends on the user’s needs.
Chapter 8. Decentralized Derivatives
Financial markets are not limited to the simple exchange of assets – derivatives (financial derivatives) such as futures, options and swaps play an important role . In traditional finance, these instruments are used for risk insurance, speculation and hedging .
DeFi has opened up the possibility of trading derivatives without brokers and exchanges using smart contracts .
A derivative is a contract that derives its value from another asset (e.g. Bitcoin, oil, stocks).
- BTC/USDT futures are a contract to buy or sell Bitcoin in the future at a pre-agreed price.
- ETH options – give the right (but not the obligation) to buy or sell ether in the future.
- Synthetic assets are cryptocurrency versions of real assets (for example, sTSLA – tokenized Tesla shares ).
✅ What are derivatives used for?
- Risk hedging is the insurance of investments against falling prices.
- Speculation is making money on changes in asset prices.
- Access to markets – the ability to trade assets without owning them directly.
8.2 Decentralized Derivatives Platforms
There are several platforms in DeFi that allow derivatives trading without centralized intermediaries.
1️⃣ Synthetix – release of synthetic assets.
2️⃣ dYdX – margin trading and futures.
3️⃣ Opyn – Ethereum options.
💡 All these platforms operate on the basis of smart contracts , ensuring transparency and security.
8.3 Synthetix – tokenization of any assets
Synthetix is one of the most advanced DeFi protocols that allows the creation of synthetic assets (Synths).
1. The user locks SNX tokens in a smart contract.
2. Synthetic assets are issued on their basis (sUSD, sTSLA, sBTC).
3. These assets can be traded on the decentralized exchange Kwenta .
✅ Examples of assets in Synthetix:
- sUSD – synthetic dollar (analog of stablecoins).
- sBTC – tokenized Bitcoin.
- sTSLA – synthetic Tesla shares.
- If the price of SNX falls, the system may liquidate the collateral.
- Prices of synthetic assets depend on oracles , which can be subject to attacks.
8.4 dYdX – Margin Trading and Futures
dYdX is a platform for perpetual futures (contracts without an expiration date).
- Users can borrow funds and open trades with leverage up to 20x .
- All transactions take place through smart contracts , and liquidations are carried out automatically.
- No registration or KYC – any user can trade.
- Low fees compared to centralized exchanges.
- Perpetual contracts allow you to hold positions without an expiration date.
- Liquidation risks – if the price of the asset changes significantly, the collateral may be sold.
- Dependence on liquidity – if there are few participants, it is difficult to close a position.
📌 Example of a leveraged trade:
2. Take a loan in USDC and buy 10 ETH with 10x leverage .
3. If the price of ETH rises, your profit increases 10 times.
4. If the price of ETH falls, the system liquidates the position and sells your ETH.
💡 Conclusion: dYdX is a powerful tool for traders, but it requires an understanding of liquidation risks .
8.5 Options in DeFi – Opyn and Hegic
Options are contracts that give the right to buy or sell an asset in the future at a fixed price.
- Opyn is an Ethereum-based options protocol.
- Hegic is an AMM platform for options trading.
- Complete decentralization – no one can cancel or freeze a transaction.
- Flexibility – you can create options with any parameters.
- Low liquidity compared to traditional markets.
- High fees for opening options contracts.
📌 Example of options trading in Opyn:
1. You buy a Call option on ETH with a strike price of $2000.
2. If the price of ETH rises to $2500, you can exercise the option and buy ETH at $2000.
3. If the price of ETH falls, you simply do not exercise the option and lose the premium.
💡 Conclusion: Options are a powerful tool for hedging risks, but they require an understanding of trading strategy .
8.6 Advantages of Decentralized Derivatives
✅ Accessibility – no registration required, you can trade anonymously.
✅ Transparency – all transactions are recorded in the blockchain.
✅ Automation – liquidations and payments occur without the participation of third parties.
📌 Comparison of DeFi and CeFi (crypto exchanges) for derivatives:
Centralized Exchanges (Binance, FTX, OKX)
Difficulty in eliminating sudden movements
💡 Conclusion: DeFi derivatives provide great freedom , but require a deep understanding of how the market works .
1. Derivatives allow you to hedge risks and earn on price movements.
2. Synthetix creates synthetic assets that trade like real ones.
3. dYdX offers margin trading and futures without registration.
4. Opyn and Hegic allow options trading via smart contracts.
5. DeFi derivatives provide more freedom , but require understanding of liquidation and collateral mechanisms .
Chapter 9. Decentralized Portfolio Management
In traditional finance, portfolio management involves managing assets to minimize risk and maximize returns . It is typically performed by banks, hedge funds, and financial advisors , who charge high fees for managing capital .
DeFi offers an alternative – automated asset management strategies powered by smart contracts . This allows users to invest without trusting intermediaries .
9.1 What is decentralized portfolio management?
Decentralized portfolio management (or DeFi Asset Management ) is the use of smart contracts to automatically manage investments.
1. The user selects a control strategy .
2. The smart contract automatically distributes funds between assets.
3. The investor receives profit without active participation .
✅ Advantages of decentralized capital management:
- Full transparency – all transactions are recorded in the blockchain.
- Automatic rebalancing – strategies adapt to market changes.
- Access for everyone – even small amounts can be invested.
- No intermediaries – no hidden fees or restrictions.
- Smart contract risks – possible vulnerabilities in the code.
- Limited strategies – not all investment instruments are available.
- High fees in the Ethereum network can reduce profitability.
9.2 Major Platforms for DeFi Asset Management
There are several leading platforms in the market that offer automated portfolio management .
1️⃣ TokenSets – algorithmic investment strategies.
2️⃣ Yearn Finance – automated income (yield farming).
3️⃣ Enzyme Finance – fund management without intermediaries.
💡 Each of these platforms offers unique capital management mechanics .
9.3 TokenSets – automated trading strategies
TokenSets is a DeFi platform that allows investors to create and use automated strategies .
- Users can choose from ready-made portfolios created by traders and algorithms.
- Dynamic strategies are possible , where assets automatically change depending on the market.
- Investors can create their own strategies and attract subscribers.
- Robo-sets – work according to an algorithm (for example, they buy ETH when it is cheap and sell it when it grows).
- Public trading sets – copy the strategies of famous investors.
- You buy the ETH RSI Set , which uses the Relative Strength Index (RSI) for trading.
- When the RSI shows “overbought”, Set sells ETH and takes profit.
- When RSI signals “oversold”, Set buys ETH again.
💡 Conclusion: TokenSets are a convenient way to invest in algorithmic strategies without the need for manual management.
9.4 Yearn Finance – automated profitability strategies
Yearn Finance (YFI) is a yield farming platform .
📌 How does Yearn Finance work?
1. The user deposits assets into Yearn Vaults .
2. The smart contract automatically redirects funds to the most profitable DeFi protocols .
3. The investor receives maximum income with minimum costs .
✅ Advantages of Yearn Finance:
- Automatic control – no need to manually search for the best rates.
- Reduced fees – combined deposits save on gas fees.
- Access to complex strategies that were previously only available to professionals.
- Dependency on other DeFi protocols – if one protocol is hacked, it will impact Yearn Finance.
- Difficulty in understanding strategies – some algorithms are only suitable for experienced users.
- You put DAI into the Yearn Vault.
- The protocol automatically distributes funds between Aave, Compound and Curve to choose the best yield .
- You get higher returns than on regular DeFi platforms .
💡 Conclusion: Yearn Finance is a “smart bank” in DeFi that finds the best investment opportunities on its own .
9.5 Enzyme Finance – decentralized investment funds
Enzyme Finance (formerly Melon) is a platform for creating decentralized funds .
1. The manager creates an investment fund and sets a strategy.
2. Investors can invest in this fund.
3. All operations are transparent and carried out through smart contracts.
- Anyone can create their own investment fund .
- Full transparency – all transactions are open on the blockchain.
- Flexibility – you can invest in various DeFi assets.
- Low liquidity – not all funds have sufficient volume of assets.
- Risks of errors in smart contract code .
- You create a fund that automatically invests 50% in ETH, 30% in DAI and 20% in UNI .
- Investors can invest in this fund and the strategy will be executed automatically .
💡 Conclusion: Enzyme Finance makes fund management accessible to everyone without the involvement of banks.
9.6 Comparison of DeFi Asset Management Platforms
- If you want to invest in algorithms → TokenSets .
- If you want to receive passive income → Yearn Finance .
- If you want to create your own fund → Enzyme Finance .
1. DeFi offers automated portfolio management tools without intermediaries.
2. TokenSets allows you to copy traders’ strategies and algorithms .
3. Yearn Finance automatically redistributes capital to the best protocols .
4. Enzyme Finance makes it possible to create investment funds on the blockchain .
5. DeFi investing requires an understanding of the mechanisms, but opens up new opportunities .
Chapter 10. Decentralized Lotteries and Gambling in DeFi
Lotteries and gambling have been around since ancient times and are a huge part of the entertainment industry. However, in the traditional sector, casinos and lotteries are centralized :
- Players must trust the organizers who can manipulate the results.
- Commissions and taxes eat up a significant portion of winnings .
- Government regulations may restrict access to gambling.
Decentralized finance ( DeFi ) offers a new approach – transparent, fair and automated gambling on the blockchain .
10.1 What are decentralized lotteries and gambling?
Unlike traditional casinos, DeFi lotteries run on smart contracts , which makes them:
✅ Transparent – results are fully verifiable on the blockchain.
✅ Secure – no one can change the results once the game has started.
✅ No intermediaries – no need to trust the organizers.
📌 The main difference between DeFi lotteries: In some projects, the player does not lose money , even if he does not win!
10.2 PoolTogether – Lottery Without Losses
PoolTogether is a revolutionary risk-free lottery that allows users to participate without losing money .
1. Users deposit stablecoins (e.g. USDC, DAI ) into the pool.
2. These funds are sent to DeFi lending protocols (Compound, Aave) , where they earn interest.
3. After a certain period, all accumulated interest is distributed among the participants .
4. Even if the player does not win, he can take his bet back .
- Players do not lose money – they only freeze it temporarily.
- Absolute transparency – results are visible on the blockchain.
- Easy to participate – all you need is a Metamask wallet.
- The probability of winning depends on the size of the deposit .
- Funds can be withdrawn not immediately, but only after the round is completed .
- You deposit 100 USDC into PoolTogether.
- After a week the pool earns 5000 USDC in percentage .
- These 5000 USDC are raffled off between the participants .
- If you don’t win, your 100 USDC stays in place .
💡 Conclusion: PoolTogether is a new format of gambling, where participants can only win or stay with their money .
10.3 Chainlink VRF – Fair Random Numbers in DeFi
One of the main problems with lotteries is randomness . In centralized systems, organizers can falsify the results .
Chainlink VRF (Verifiable Random Function) is a protocol that generates random numbers on the blockchain .
- Every time a winner needs to be determined, Chainlink VRF generates a random number .
- Any user can verify that it has not been tampered with .
💡 Conclusion: Chainlink VRF makes DeFi lotteries truly fair .
10.4 Decentralized Casinos – Uniswap V3 as Roulette
While in a traditional casino, players bet on numbers or colors , in DeFi, Uniswap V3 can be used as a roulette analogue.
1. A player puts capital into liquidity on Uniswap V3 .
2. If the token price remains in the range , the player makes a profit (similar to a bet on black or red).
3. If the price goes outside the range, the player loses part of the capital .
💡 Conclusion: Uniswap V3 can be used not only for exchanging tokens, but also as a staking mechanism .
10.5 Risks and Security of DeFi Lotteries
Although decentralized lotteries are fairer , they also have certain risks :
1. Errors in smart contract code – if the code is poorly written, hackers can break into the system.
📌 Example: In 2021 , the pNetwork protocol was hacked , which used a vulnerable smart contract.
2. Liquidity risks – if the project does not attract enough participants, the prize pool may be too small.
3. Price manipulation – If a DeFi lottery uses oracles, they can be attacked to change the odds.
💡 How to avoid risks?
✅ Use only proven projects , such as PoolTogether .
✅ Check smart contract audits .
✅ Do not invest all your funds in one project .
10.6 Comparison of Traditional and DeFi Lotteries
DeFi lotteries (PoolTogether, Chainlink VRF)
The money is kept by the organizers
Money is stored in DeFi protocols
Depends on the number of tickets
There may be errors in the code
💡 Conclusion: DeFi lotteries offer fair mechanisms and transparent algorithms , but users must understand the technical risks .
1. PoolTogether is an innovative lottery where players do not lose money .
2. Chainlink VRF Makes DeFi Games Absolutely Fair .
3. Uniswap V3 can be used as a casino , allowing bets on price ranges .
4. Although DeFi games are transparent, bugs in the code can create risks for users .
5. In the future, decentralized casinos may replace traditional ones as they give players more control and fairness .
Chapter 11. Decentralized Insurance: How to Protect Investments in DeFi
Despite the huge opportunities of DeFi, users face risks such as:
- Smart contract hacks and vulnerabilities.
- Errors in the code leading to loss of funds.
- Sharp price drops and foreclosures.
In traditional finance, insurance companies offer protection against financial loss, but they require trust in centralized structures .
DeFi provides a new format of insurance where users can insure their assets without intermediaries .
11.1 What is decentralized insurance?
Decentralized insurance (DeFi Insurance) is an automated system for protecting funds using smart contracts.
1. Users purchase an insurance policy by paying a premium into a smart contract .
2. If an insured event occurs ( hacking, code error, liquidation ), the policy pays compensation.
3. All processes are carried out without the participation of insurance companies – payments are made automatically.
✅ Advantages of decentralized insurance:
- Automatic payments – no paperwork.
- Transparency – all conditions are recorded in the blockchain.
- Flexibility – users can choose which risks to insure.
- Limited coverage – some risks (such as price manipulation) are not insured.
- Possible delays in payments if voting on payments is done manually.
- Liquidity dependent – if there are not enough funds in the pool, payouts may be partial.
💡 Conclusion: DeFi insurance improves security , but does not replace traditional precautions.
11.2 Major Platforms for Decentralized Insurance
There are several popular insurance platforms in the DeFi market .
1️⃣ Nexus Mutual – smart contract insurance.
2️⃣ Armor Finance – KYC-free fund protection.
3️⃣ Unslashed Finance – liquidation and asset insurance.
💡 Each platform offers different insurance mechanisms .
11.3 Nexus Mutual – Smart Contract Insurance
Nexus Mutual is the largest decentralized insurance platform, operating since 2019.
- Users buy insurance against hacking or errors in smart contracts .
- If a hack occurs, Nexus Mutual votes to pay compensation.
- Insurance funds are formed by participants who invest NXM tokens .
- Protocol hacking (eg Aave, Uniswap, Compound ).
- Smart contract errors.
- Liquidations during a market collapse.
❌ Disadvantages of Nexus Mutual:
- Payouts depend on community voting.
- Registration and identity verification (KYC) is required.
- You invest 10,000 DAI in Yearn Finance and buy an insurance policy that pays 1% per annum .
- If Yearn Finance is hacked and your DAI is lost, Nexus Mutual votes to pay compensation.
💡 Conclusion: Nexus Mutual is the best option for smart contract insurance , but requires trust in community voting.
11.4 Armor Finance – protection without KYC
Armor Finance is an alternative to Nexus Mutual that allows you to insure funds without registration .
- Armor automatically tracks what funds a user holds in DeFi protocols.
- If a hack occurs, the insurance payment is made instantly without voting.
✅ Advantages of Armor Finance:
- No KYC – you can insure your funds anonymously.
- Flexible payment system – you can pay only for the actual use of insurance.
- Only available for major DeFi protocols.
- There may not be enough liquidity for large payouts.
💡 Conclusion: Armor Finance makes DeFi insurance accessible to everyone , but does not cover small DeFi projects .
11.5 Unslashed Finance – liquidity protection
Unslashed Finance is liquidity and asset insurance .
- Stablecoins from losing their peg to the dollar (eg DAI).
- Decentralized exchanges from attacks and hacks.
- DeFi token price fluctuations .
- You can insure stablecoins , which is not the case with Nexus Mutual and Armor.
- Supports insurance against multiple risks simultaneously .
- Works only with the largest assets.
- The commission is higher than that of competitors.
- You insure 1,000 USDC against loss of the dollar peg.
- If the USDC price drops below $0.90, Unslashed Finance pays the difference .
💡 Conclusion: Unslashed Finance is a great solution for protecting liquidity and stablecoins .
11.6 How to choose an insurance platform?
- If you want to insure your investments in DeFi protocols → Nexus Mutual.
- If you do not want to go through verification → Armor Finance.
- If you are worried about stablecoins and liquidity → Unslashed Finance.
💡 Conclusion: The choice depends on the specific risks you want to insure.
1. Insurance in DeFi protects against losses due to hacks and smart contract bugs .
2. Nexus Mutual – largest platform but requires KYC and community voting .
3. Armor Finance allows you to insure funds without registration .
4. Unslashed Finance covers unique risks, including stablecoin devaluation .
5. Insurance is an additional security measure, but it does not replace the need for asset diversification .
Chapter 12. Decentralized Payments and the Future of Cryptocurrencies
One of the main goals of DeFi is to create an alternative to traditional payment systems . Today, the global financial infrastructure depends on banks, payment systems (Visa, Mastercard) and government regulators .
But what if you could make payments without intermediaries, commissions and borders?
DeFi payments are a step towards financial freedom , where users can send money quickly, cheaply and securely .
12.1 Problems with Traditional Payment Systems
Despite the prevalence of bank transfers, they have a number of disadvantages :
❌ High fees – SWIFT transfers can cost up to $50 .
❌ Slow speeds – international payments take 1-5 days .
❌ Censorship – banks can block transactions or freeze accounts.
❌ Limited availability – over 1.7 billion people in the world do not have a bank account .
💡 Solution? Decentralized payments via blockchain.
12.2 Decentralized payment networks
DeFi offers a new payment format that does not require banks and processing centers .
📌 Key solutions:
1️⃣ Stablecoins (USDC, DAI, BUSD) – replacing fiat currencies in cryptocurrency form.
2️⃣ Layer 2 networks (Lightning Network, Arbitrum) – make transactions cheaper and faster.
3️⃣ Decentralized payment services (Celo, Flexa, xDai) – allow you to make purchases in cryptocurrency.
12.3 Stablecoins – the basis of decentralized payments
Stablecoins (USDT, USDC, DAI) are used as the main payment instrument in DeFi .
📌 Why are stablecoins convenient?
✅ Fixed rate – 1 USDC is always equal to 1 dollar.
✅ Low fees – transfers cost a few cents in Layer 2 networks.
✅ Global availability – no bank account required.
- In Venezuela, people use USDT instead of the national currency because it is hyperinflating.
- In Africa, USDC is replacing bank accounts for international transfers.
💡 Conclusion: Stablecoins are a key tool for DeFi payments.
12.4 Layer 2 solutions – instant and cheap transfers
One of the problems with the Ethereum blockchain is high fees and network congestion .
💡 Solution? Layer 2 technologies that speed up transactions.
📌 Best Layer 2 networks for payments:
- Lightning Network – for Bitcoin.
- Arbitrum and Optimism – make transfers on Ethereum cheaper.
- Polygon (MATIC) – reduces fees to $0.001 per transaction .
- Thousands of transactions per second .
- Minimal commissions .
- Flexibility and compatibility with Ethereum and other networks .
- On the Arbitrum network, USDC transfers cost less than 1 cent and are completed in seconds.
- Lightning Network allows you to send BTC without waiting for block confirmations .
💡 Conclusion: Layer 2 solves the main problem of blockchains – scalability .
12.5 Decentralized payment services
Today, there are already decentralized analogues of PayPal and Visa that operate on the blockchain.
📌 The best DeFi payment platforms:
1️⃣ Celo – a mobile platform for instant payments.
2️⃣ Flexa – allows you to pay with cryptocurrency in regular stores.
3️⃣ xDai – a blockchain for micropayments.
12.6 Celo – Mobile Crypto Payments
Celo is a blockchain built specifically for mobile payments .
- Users can send stablecoins via regular SMS .
- Instead of long addresses, phone numbers are used .
- Commissions are minimal (less than 1 cent).
- Convenient for people without a bank account.
- Works even on weak smartphones.
- Supports stablecoins and NFTs .
- In Kenya, farmers use Celo to transfer money without banks or intermediaries .
💡 Conclusion: Celo is the future of mobile payments on the blockchain.
12.7 Flexa – Crypto Payments in Regular Stores
Flexa is a decentralized payment system that allows you to pay with cryptocurrency in supermarkets and cafes.
1. You pay for your purchase in cryptocurrency (BTC, ETH, USDC).
2. Flexa instantly converts it to fiat.
3. The store receives regular dollars .
✅ Where can you already pay with crypto?
- Starbucks
- Nordstrom
- Whole Foods
💡 Conclusion: Flexa makes cryptocurrency convenient for everyday payments .
12.8 xDai – Blockchain for Micropayments
xDai is a network optimized for cheap transfers .
- Transfer fee 0.0001$ .
- Support for NFTs and decentralized applications .
- Possibility of automatic payments (salaries, subscriptions).
- In Argentina, xDai is used to pay for subscriptions to services .
💡 Conclusion: xDai is ideal for small payments and automation .
12.9 Advantages of DeFi payments over traditional ones
💡 Conclusion: DeFi payments are faster, cheaper and freer than traditional ones.
1. Decentralized payments replace banks and SWIFT .
2. Stablecoins (USDC, DAI) have become a crypto alternative to the dollar .
3. Layer 2 (Arbitrum, Lightning) solves the scalability problem .
4. Celo, Flexa, xDai make crypto convenient for regular purchases .
5. In the future, DeFi payments may become the basis of the global financial system .
Chapter 13. The Future of DeFi and its Impact on the Global Economy
DeFi has upended the traditional financial system by creating a new marketplace that operates without banks, brokers, and regulators . However, many are asking questions:
- Will DeFi Remain a Niche Instrument?
- How will states regulate decentralized finance?
- Can DeFi Replace Banks and the Stock Market?
This chapter is dedicated to the development of DeFi and its global impact .
13.1 DeFi Achievements in Recent Years
DeFi has grown from an experiment for enthusiasts into a multi-billion dollar industry .
- 2018 – Launch of MakerDAO and the first decentralized stablecoin (DAI).
- 2020 – DeFi protocol boom: Uniswap, Aave, Compound.
- 2021 – Total Value Locked (TVL) soars to $250 billion .
- 2022 – Volatility and crisis in the crypto market, the fall of Terra (UST).
- 2023-2024 – Active development of Layer 2 solutions and real application of DeFi in finance.
💡 Conclusion: DeFi has already proven its viability and is ready for mass adoption.
13.2 Key Challenges for the Future of DeFi
While DeFi has huge potential , it faces key challenges .
Ethereum and other blockchains are not yet able to handle the large number of users .
📌 Solution? Layer 2 and new blockchains:
- Arbitrum and Optimism have reduced Ethereum fees by tens of times .
- Solana, Avalanche, Polkadot – offer alternative ecosystems with high speed.
💡 The future of DeFi depends on improving blockchain performance.
Governments see DeFi as a threat to the banking system . Many countries have already begun to regulate this sector.
- US – Tornado Cash Banned, Stablecoin Laws Discussed.
- EU – MiCA bill regulating crypto assets.
- China – Complete Ban on DeFi and Cryptocurrencies.
💡 Conclusion: DeFi must adapt to new laws, otherwise it may be banned in a number of countries.
DeFi protocol hacks have resulted in the loss of over $2 billion in recent years .
- 2022 – Wormhole hack, $320 million lost.
- 2023 – Euler Finance attack, $197 million in damages.
📌 How does DeFi solve this problem?
- Smart contract audits (Certik, OpenZeppelin).
- Insurance in DeFi (Nexus Mutual, Armor Finance) .
- Security algorithms update (zk-SNARKs, multi-signatures) .
💡 Security is the main factor for mass adoption of DeFi.
13.3 How will DeFi change the global economy?
DeFi is already impacting traditional finance , and its impact will only grow.
📌 Key areas:
✅ Access to finance without banks – in countries without a developed banking system, DeFi has become an alternative (Africa, Latin America).
✅ Automation of finance – loans, insurance and investments are becoming fully automated .
✅ Reduced fees – international transfers are almost free (Lightning Network, Arbitrum).
✅ Competition with banks – if banks do not adapt, they will lose customers .
💡 Conclusion: DeFi is creating a new global financial order where banks are no longer needed.
13.4 Possible scenarios for the future of DeFi
DeFi is becoming the backbone of the global financial system.
Banks are integrating DeFi protocols into their work.
States are restricting DeFi, leaving only some of the functions.
Governments Ban DeFi, But It Goes Underground
- Banks will likely not disappear completely , but will start using DeFi .
- States will regulate stablecoins and large protocols.
- DeFi will adapt and continue to evolve.
💡 Conclusion: DeFi will not replace traditional finance immediately, but it will change it forever.
13.5 What technologies will make DeFi even more powerful?
In the coming years, new innovations will make DeFi even more convenient and secure .
- CBDC (Central Bank Digital Currencies) – States can create DeFi-compatible digital money .
- zk-SNARKs and ZK-Rollups – will improve security and anonymity .
- AI in DeFi – Artificial Intelligence Will Be Able to Automate Investments and Risk Management .
💡 The future of DeFi is a combination of blockchain, AI, and automation.
1. DeFi has already impacted the global financial system, but its development is just beginning.
2. The main challenges are scalability, regulation and security.
3. Global banks and companies will start integrating DeFi, not fighting it.
4. Technologies such as Layer 2, ZK-Rollups and AI will accelerate the development of DeFi.
5. The future of DeFi is not a replacement for traditional finance, but its evolution.
Conclusion: Final Takeaways from How DeFi Is
How DeFi Works is a guide to decentralized finance that helps you understand how the new financial system works without banks and intermediaries . DeFi is changing the way we lend, invest, pay, and insure, giving users complete control over their assets .
📌 1. DeFi is an alternative to traditional finance.
- In the classical system, banks and financial institutions control money.
- In DeFi, governance is delegated to smart contracts and the user community .
- Ethereum and smart contracts are the foundation of decentralized applications.
- DEX (Uniswap, Sushiswap) – exchanges without intermediaries.
- DeFi lending (Aave, Compound) – loans without banks.
- Stablecoins (DAI, USDC) – replacement of fiat money in the blockchain.
- Layer 2 (Arbitrum, Optimism) – solutions for scaling and reducing fees.
📌 3. DeFi makes finance open and accessible to everyone.
- Anyone with internet access can invest, borrow, earn and transfer money .
- This is especially important for countries where the banking system is not accessible .
- Smart contract hacks (millions of dollars lost annually).
- High volatility of cryptocurrencies.
- Regulatory pressure from states.
📌 5. The future of DeFi is integration with the traditional economy.
- Banks and financial corporations are already exploring the possibilities of integrating DeFi .
- More regulation is expected , but it won’t stop decentralization .
🔹 Who will benefit from this book?
✅ For crypto newbies – explains the basic principles of DeFi.
✅ For investors – shows how lending and trading protocols work.
✅ For developers – gives an understanding of the architecture of decentralized applications.
✅ For economists and financiers – explains why DeFi has already changed the world of finance.
🔹 Alternative Books to Learn DeFi
📖 Mastering Ethereum (Andreas Antonopoulos) – a technical guide to Ethereum.
📖 The Infinite Machine (Camilla Russo) – the story of Ethereum and DeFi.
📖 The Bitcoin Standard (Saifedean Ammous) – explains why cryptocurrencies are important for the future.
📖 Layered Money (Nick Batya) – about the evolution of financial systems and the role of DeFi.
🔹 Bottom Line: Is DeFi Worth Learning?
✅ DeFi is not just a trend, but a new financial system that is already working.
✅ Those who understand DeFi today will gain an advantage in the future.
✅ If traditional finance is controlled by states, then DeFi is the freedom of money.
💡 Conclusion: The book “How DeFi is” perfectly explains why decentralized finance is not just an alternative to banks, but the future of the entire financial industry.