Decentralization
DeFi Fundamentals
DeFi, smart contracts, dApps, and DAOs — software replacing middlemen.
In this lesson
- What decentralized finance offers
- How it differs from a bank
Key takeaways
- 1DeFi rebuilds financial services as open smart contracts
- 2It's permissionless — no application or gatekeeper
- 3You keep custody, but you also carry the risk
Lesson summary
DeFi rebuilds financial actions as open smart-contract systems.
Mental model
The core idea behind DeFi fundamentals
DeFi rebuilds financial actions as open smart-contract systems. It removes some middlemen, but it also moves responsibility from institutions to users and code.
- What decentralized finance offers
- How it differs from a bank
Mechanics
How to reason about DeFi fundamentals
Users connect wallets instead of opening traditional accounts.
Smart contracts define the rules for swaps, lending, collateral, and rewards.
Anyone can inspect or interact with many protocols, but that openness does not remove risk.
- DeFi rebuilds financial services as open smart contracts
- It's permissionless — no application or gatekeeper
- You keep custody, but you also carry the risk
Example
Seeing DeFi fundamentals in action
A lending market can accept ETH as collateral and let a user borrow a stablecoin without a loan officer. The protocol enforces collateral rules automatically.
Common mistakes
How DeFi fundamentals trips learners up
Permissionless does not mean safe. It means access is open; users still need to understand contract, oracle, liquidation, and approval risk.
Risk notes
Reading the risk in DeFi fundamentals
Smart-contract exploits, oracle manipulation, bad governance, and user signing errors can cause losses without a support desk reversing them.
- Define DeFi in one sentence.
- Identify what the smart contract replaces.
- Name at least two DeFi risks.
Practice
Make DeFi fundamentals stick
- Define DeFi in one sentence.
- Identify what the smart contract replaces.
- Name at least two DeFi risks.
Review
Key terms
- Custody
- Who controls the private keys. Custodial = a third party holds them; non-custodial = you do.
- DeFi
- Decentralized Finance — permissionless, composable financial services built on smart contracts.
- Liquidation
- Forced closure of a leveraged position when margin can no longer cover its losses.
- Liquidity
- How easily an asset can be bought or sold without moving its price much.
- Oracle
- A service that feeds real-world data (like prices) to smart contracts on-chain.
Source notes
Editorial references
These references are starting points for verifying the mechanisms, risk checks, and product context behind this lesson.
Before you continue
Can you do these?
- Define DeFi in one sentence.
- Identify what the smart contract replaces.
- Name at least two DeFi risks.
Related learning
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DeFi stands for…