Module 3
Understand DeFi
DeFi stands for decentralized finance. This lesson explains how major protocol categories work, what risks are unique to DeFi, and how beginners should participate responsibly.
Learning Objectives
You will be able to identify core DeFi primitives, read basic protocol metrics, and execute a low-risk first interaction plan.
What DeFi Is
DeFi replaces many financial intermediaries with smart contracts. Instead of using a bank to execute logic, you interact with protocol code deployed on chain.
- Permissionless access for users with internet and wallet access
- Transparent on-chain state and transactions
- Composable protocols that can interact with each other
Main DeFi Protocol Types
- DEX: token swaps using liquidity pools
- Lending markets: collateralized borrowing and lending
- Stablecoin systems: fiat-pegged units for lower volatility
- Yield protocols: strategies that route capital for returns
How a Basic DeFi Flow Works
- Connect wallet to protocol website.
- Approve token spending permission.
- Execute action such as swap, supply, or borrow.
- Confirm transaction on chain and track receipt.
Important: approvals are separate from actions. Approvals can remain active and should be reviewed periodically.
Major Risks to Understand
- Smart contract risk: bugs, design flaws, or exploit paths
- Oracle risk: incorrect price feeds affecting liquidations
- Liquidity risk: slippage and inability to exit at expected price
- Governance risk: harmful proposals or key concentration
- User error: wrong chain, wrong address, wrong approval scope
Practice rule: start with small sizes and treat every first interaction as a test transaction.
Beginner Participation Plan
- Pick one established protocol with audit history.
- Read docs and risk section before connecting wallet.
- Execute one small swap and one small supply action.
- Review approvals with a revocation tool afterward.
- Document what happened, including gas costs.