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Decentralized Finance (DeFi) Basics: From Concept to Application - web3 Series Section 8

2025-08-198 Minute

A few years ago, when everyone was still discussing Bitcoin and blockchain, DeFi (Decentralized Finance) was quietly born. In just a few years, it has grown from an experimental concept to a trillion-level market. Many people refer to DeFi as the “open financial revolution” because it is reshaping the way we understand and use finance.

As someone who has been polishing content in the Web3 circle for a long time and accompanying customers to explore opportunities, I found that most people have three common impressions of DeFi:I’ve heard of it, but I don’t understand it; I think it’s risky, but I’m curious about it; I know it can make money, but I don’t know how to play it.Today I will help you understand DeFi’s core logic, real cases, and its opportunities and challenges from scratch.

What is DeFi?

Simply put,DeFi is “financial services” built on the blockchain. Traditional finance (TradFi) has banks, securities companies, and payment institutions as intermediaries; DeFi replaces these "intermediaries" with smart contracts.

traditional finance: You deposit money into the bank, the bank determines the interest rate and loan conditions, and the flow of funds relies on centralized institutions.
Decentralized Finance: You directly deposit crypto assets into an on-chain contract (such as Aave), and the interest rate is determined by the algorithm. No bank is required for trading and lending.

One sentence summary:DeFi = "Banking + Investment + Payment + Derivatives" on the blockchain, and it is globally open and 24/7 without any threshold.

The core features of DeFi

Disintermediation

There are no banks or third parties, all rules are enforced by code.

Transparent and open

Contract codes and transaction records are on the chain and anyone can check them.

Composability (Lego Effect)

Different DeFi protocols can be pieced together like Lego. For example: deposit funds into Compound to obtain interest → then use the proceeds to trade on Uniswap → finally mortgage them to mint stablecoins in MakerDAO.

Global and no threshold

Whether you are in Beijing or a small town in Africa, as long as you have an Internet connection and a wallet, you can access it.

Real case analysis

Let’s look at a few cases to see how DeFi works:

Case 1: Compound - the encrypted version of “bank deposit”

Compound is one of the first decentralized lending protocols. Users can deposit crypto assets such as ETH and USDC to earn interest, and borrowers can mortgage assets for loans. In 2020, Compound’s annual interest rate on deposits was as high as 8%-12%, attracting a large number of users.

👉 Enlightenment: DeFi replaces banks with codes, and interest rates are transparent and shared globally.

Case 2: Uniswap - Automated Exchange (DEX)

Uniswap is currently the largest decentralized exchange. Unlike centralized exchanges like Binance, Uniswap does not match order books;AMM (Automated Market Maker) mechanismto broker deals. 👉 Enlightenment: Anyone can become a "liquidity provider" and share the fee income. This is the "inclusive finance" feature of DeFi.

Case 3: MakerDAO - the financial cornerstone of stablecoins

MakerDAO allows users to stake ETH to mint the stablecoin DAI (1 DAI ≈ 1 USD). This provides a stable payment and settlement tool for the DeFi world.

👉 Enlightenment: Stablecoins are the blood of DeFi. Without DAI or USDC, DeFi cannot operate on a large scale.

The current state of data in DeFi

In November 2021, DeFi’s total locked-up volume (TVL) once exceeded$250 billion.
By the end of 2023, TVL remained atUS$40-50 billion, indicating that the market has experienced substantial adjustments, but core applications still persist.
The top five DeFi protocols (Aave, Uniswap, MakerDAO, Curve, Lido) currently occupy70%+ of funds.

👉 Data tells us: Despite the bear market, DeFi is still the core track of Web3.

Opportunities and challenges of DeFi

Chance

Inclusive finance: DeFi can provide financial services to hundreds of millions of people in areas not covered by traditional banks.
New investment opportunities: Liquidity mining, income aggregator, DeFi derivatives.
open innovation: Anyone can innovate applications on DeFi infrastructure.

challenge

security risk: Losses caused by DeFi hacks in 2021 exceeded$3 billion.
high volatility: Asset prices fluctuate violently, easily leading to liquidation.
regulatory uncertainty: Governments’ regulatory attitudes towards DeFi are still changing.
User threshold: The wallet operation is complicated and newbies are prone to making mistakes.

future trends

Compliance and regulatory integration

Compliance DeFi (RegFi) is on the rise, such as regulated stablecoins and on-chain KYC.

Cross-chain interoperability

With the development of Layer2 and cross-chain bridges, DeFi will break the silos between chains.

Integration with Real-World Assets (RWA)

Real estate, bonds, and notes may all be issued and circulated through DeFi.

AI + DeFi

The combination of AI in risk control and intelligent investment advisory will make DeFi more intelligent.

[Frequently Asked Questions (FAQ)]

Q1: Can DeFi definitely make money?

A1:uncertain. DeFi offers the opportunity to earn interest and liquidity gains, but it also comes with risks, such as hacks and price drops.

Q2: Will DeFi replace banks?

A2:I don't think it will be a "complete replacement". Banks have supervision and credit endorsement in the real economy, and DeFi is more likely to complement traditional finance and become a new financial tool.

Q3: How can newbies get started with DeFi?

A3:The simplest way is to prepare a small amount of stable currency (such as USDC), and then try to deposit it into a protocol like Aave or Curve to experience the interest income.

Q4: What should you pay attention to when participating in DeFi?

A4:Three points: ① Start with a small amount; ② Choose a leading protocol (higher security); ③ Pay attention to asset diversification and don’t go all-in.

Summarize

DeFi is not a get-rich-quick tool, but a rapidly evolvingopen financial system. Its greatest value lies in:

Lower financial threshold
Improve transparency and efficiency
Bringing unprecedented financial innovation

As investors or explorers, we must clearly understand that opportunities and risks coexist. But if you can gradually accumulate experience through learning and small-scale practice, you will find that DeFi is actually not a "distant high technology", but a possible daily life in our future financial life.

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