--- TITLE: Intro to DeFi DESCRIPTION: Understand the basics of decentralized finance. LANGUAGE: English WRITERS: Ap0ll0 EDITORS: Claude (Anthropic AI, 2026 review) TRANSLATORS: X LINK: https://app.banklessacademy.com/lessons/intro-to-defi FORMAT: LESSON --- ``` __________________________________________________________________________________________________________________________________________________________ $$$$$$$\ $$\ $$\ $$$$$$\ $$\ $$ __$$\ $$ | $$ | $$ __$$\ $$ | $$ | $$ | $$$$$$\ $$$$$$$\ $$ | $$\ $$ | $$$$$$\ $$$$$$$\ $$$$$$$\ $$ / $$ | $$$$$$$\ $$$$$$\ $$$$$$$ | $$$$$$\ $$$$$$\$$$$\ $$\ $$\ $$$$$$$\ | \____$$\ $$ __$$\ $$ | $$ |$$ |$$ __$$\ $$ _____|$$ _____| $$$$$$$$ |$$ _____|\____$$\ $$ __$$ |$$ __$$\ $$ _$$ _$$\ $$ | $$ | $$ __$$\ $$$$$$$ |$$ | $$ |$$$$$$ / $$ |$$$$$$$$ |\$$$$$$\ \$$$$$$\ $$ __$$ |$$ / $$$$$$$ |$$ / $$ |$$$$$$$$ |$$ / $$ / $$ |$$ | $$ | $$ | $$ |$$ __$$ |$$ | $$ |$$ _$$< $$ |$$ ____| \____$$\ \____$$\ $$ | $$ |$$ | $$ __$$ |$$ | $$ |$$ ____|$$ | $$ | $$ |$$ | $$ | $$$$$$$ |\$$$$$$$ |$$ | $$ |$$ | \$$\ $$ |\$$$$$$$\ $$$$$$$ |$$$$$$$ | $$ | $$ |\$$$$$$$\\$$$$$$$ |\$$$$$$$ |\$$$$$$$\ $$ | $$ | $$ |\$$$$$$$ | \_______/ \_______|\__| \__|\__| \__|\__| \_______|\_______/ \_______/ \__| \__| \_______|\_______| \_______| \_______|\__| \__| \__| \____$$ | $$\ $$ | PORTABLE LESSON DATADISK COLLECTION \$$$$$$ | \______/ __________________________________________________________________________________________________________________________________________________________ ``` --- # DeFi Defined DeFi, short for `decentralized` finance, is the ecosystem of financial products, protocols, and applications that run on public `blockchain` networks. DeFi is an established, open alternative to traditional financial services, with a range of tools for putting crypto assets to work. It offers opportunities beyond simply buying crypto on a centralized exchange, and lets anyone build a decentralized, Bankless lifestyle. ![](https://app.banklessacademy.com/images/intro-to-defi/defi-defined-759c5922.svg) # Why DeFi? DeFi gives anyone with an internet connection access to sophisticated financial tools: investing, trading, lending and borrowing, and staking. DeFi offers these tools to users transparently and openly. Anyone can look at the code and verify that the contract does what it says it does, unlike what banks do with your money behind closed doors. And there is no institution in the middle deciding who gets in: no one can turn you away, freeze your account, or close it down. # Knowledge Check 1 What does DeFi stand for? - [ ] Digital finance > ℹ️ Try again! DeFi is digital, but the “De” stands for decentralized. - [x] Decentralized finance > ℹ️ Correct! DeFi is the ecosystem of financial products and applications running on public blockchains. - [ ] Deregulation field > ℹ️ Try again! DeFi is about removing middlemen through decentralization, not about deregulation. - [ ] Decentralized funding > ℹ️ Try again! Close, but the “Fi” stands for finance, not funding. # Earning Yield Many `DeFi` protocols let you earn interest and other rewards by putting your crypto assets to work. You get access to financial products that would normally require a bank or financial services firm, without the paperwork, approval process, and other hassles of traditional finance. DeFi is not free: you pay a small network fee for each transaction, and many protocols charge fees too. But these costs are typically lower and fully transparent, there is no bank overhead, and no institution can gatekeep your access or your earnings. This is why DeFi is popular. ![](https://app.banklessacademy.com/images/intro-to-defi/earning-yield-bc952747.svg) # Knowledge Check 2 How can you earn yield with crypto? - [ ] Earning interest by depositing into a DeFi protocol > ℹ️ Try again! This is one way to earn yield, but it isn’t the only one. - [ ] Earning rewards by depositing into a DeFi protocol > ℹ️ Try again! This is one way to earn yield, but it isn’t the only one. - [x] Both of the above > ℹ️ Correct! DeFi protocols let you earn both interest and other rewards by putting your crypto assets to work. - [ ] You can’t earn yield on crypto > ℹ️ Try again! Earning yield on crypto assets is one of the main reasons DeFi is popular. # What You Can Do With DeFi `DeFi` transactions are `permissionless`. This refers to a public `blockchain` that anyone can use to buy, sell, or trade assets. No third party controls or oversees activity. These transactions are carried out by decentralized applications, known as DApps. `DApps` and DeFi platforms operate 24/7, all over the world. Many run on `stablecoins`, tokens designed to hold a steady dollar value (see our [Understanding Stablecoins](https://app.banklessacademy.com/lessons/understanding-stablecoins) lesson). We will introduce four of the most common activities in DeFi: investing, trading, lending and borrowing, and staking. ![](https://app.banklessacademy.com/images/intro-to-defi/what-you-can-do-with-defi-e1e865b5.svg) # Knowledge Check 3 Fill in the blank: DeFi transactions are ____. - [ ] Free > ℹ️ Try again! DeFi transactions still cost network fees. What makes them special is that no one can block them. - [ ] Controlled > ℹ️ Try again! No third party controls or oversees DeFi activity. - [x] Permissionless > ℹ️ Correct! Anyone can buy, sell, or trade on a public blockchain without needing approval from a third party. - [ ] Centralized > ℹ️ Try again! DeFi is the opposite: it runs on decentralized applications with no central authority. # Investing The most common `DeFi` transaction is to purchase some cryptocurrency with the expectation that it will be worth more in the future. This is known as investing. HODL is a term used for keeping crypto assets for a long time. Depending on who you ask, the HODL meme either comes from a typo of HOLD or it stands for **H**old **O**n for **D**ear **L**ife. DeFi can give early access to new coins and tokens before they are listed on centralized exchanges (CEX). ![](https://app.banklessacademy.com/images/intro-to-defi/investing-7c8b44ed.svg) # Knowledge Check 4 What does HODL mean? - [ ] It’s a misspelling of HOLD > ℹ️ Try again! This is one origin story, but it isn’t the only correct answer. - [ ] Hold On for Dear Life > ℹ️ Try again! This is one meaning, but it isn’t the only correct answer. - [ ] Keeping crypto for a long time > ℹ️ Try again! This is what HODLing means in practice, but it isn’t the only correct answer. - [x] All of the above > ℹ️ Correct! HODL started as a typo of HOLD, doubles as “Hold On for Dear Life”, and means keeping crypto assets for a long time. # Trading A decentralized exchange (DEX) shows current exchange rates between different crypto tokens and coins and serves as a digital marketplace that facilitates trading one currency for another by bringing together buyers and sellers. The parties involved in a DEX trade don’t need to know or trust each other. In fact, it may appear that you are trading with the DEX. However, in most cases, the DEX creates `liquidity pools` that facilitate the trade between two traders’ `wallets` in a `permissionless` fashion. ![](https://app.banklessacademy.com/images/intro-to-defi/trading-67935721.svg) # So What? Anyone can trade and participate in markets regardless of your net asset worth. Anyone can enter or exit a position via on-chain protocols. # Knowledge Check 5 What is a DEX? - [x] A decentralized exchange > ℹ️ Correct! A DEX is a digital marketplace that brings buyers and sellers together to trade tokens without a middleman. - [ ] A derivatives exchange > ℹ️ Try again! The “D” stands for decentralized, not derivatives: a DEX is a decentralized exchange. - [ ] A crypto index fund > ℹ️ Try again! A DEX is a marketplace for trading tokens, not an investment fund. - [ ] None of the above > ℹ️ Try again! One of the above is exactly what a DEX is. # Lending & Borrowing DeFi lending and borrowing offers loans without the need for a bank or intermediary institution. Instead, lending is done on a `peer-to-peer` level: `DApps` connect lenders and borrowers directly. The lender earns interest, and the borrower pays back the loan plus interest. To borrow, you first deposit crypto worth more than the loan as `collateral`. If your collateral's value falls too far, it is automatically sold to repay the loan. This is called `liquidation`, and it is how DeFi loans stay safe without credit checks. ![](https://app.banklessacademy.com/images/intro-to-defi/lending-borrowing-b7d58dfa.svg) # Knowledge Check 6 Fill in the blank: DeFi lending is done on a _____ level. - [ ] income to debt > ℹ️ Try again! DeFi doesn't check your income: loans are secured by collateral instead. - [x] peer-to-peer > ℹ️ Correct! DeFi lending happens directly between two parties, with no bank or middleman in between. - [ ] banks to customers > ℹ️ Try again! DeFi removes the bank entirely: lending happens directly between users. - [ ] income to interest > ℹ️ Try again! Lenders do earn interest, but the lending itself happens directly between peers. # Staking `Staking` is often grouped with lending, but it is different: there is no borrower. You lock your `ether` to help keep the Ethereum network secure, and the network pays you rewards in return. Staked funds can be locked for a period of time, and `validators` who misbehave lose part of their stake, so honesty pays. Centralized exchanges offer staking too, but DeFi gives you more options while you stay in control of your assets. Learn more in our [Staking on Ethereum](https://app.banklessacademy.com/lessons/staking-on-ethereum) lesson. ![](https://app.banklessacademy.com/images/intro-to-defi/staking-8dbafcb8.svg) # Knowledge Check 7 Locking your crypto to help secure a network, in exchange for rewards, is an example of? - [ ] Trading > ℹ️ Try again! Trading is exchanging one token for another, not locking it to secure a network. - [x] Staking > ℹ️ Correct! Staking means locking your crypto to help secure a network, and earning rewards in return. - [ ] Borrowing > ℹ️ Try again! Borrowing is taking out a loan against collateral, not helping secure a network. - [ ] HODLing > ℹ️ Try again! HODLing is simply keeping your crypto for a long time, not putting it to work. # DeFi Downsides ![](https://app.banklessacademy.com/images/intro-to-defi/defi-downsides-da1fdb68.svg) **Hackers** Where there is money and technology, there are people looking for ways to hack the system. DeFi protocols and their users are frequent targets, so security habits matter. ![](https://app.banklessacademy.com/images/intro-to-defi/defi-downsides-d533aeef.svg) **Risk** DeFi runs on code: `smart contracts`. An error or loophole in that code can be exploited to drain funds. Markets bring risk too: loans can be liquidated when prices fall, and `stablecoins` can lose their steady value. ![](https://app.banklessacademy.com/images/intro-to-defi/defi-downsides-0070f0e1.svg) **No recourse** There is no customer support line, and no company or government agency to appeal to if something goes wrong. Lost or stolen funds usually cannot be reversed or refunded. # Knowledge Check 8 What is a risk in DeFi? - [ ] There are no risks > ℹ️ Try again! DeFi has real risks, like hackers and code exploits, and no one to appeal to if something goes wrong. - [ ] The bank might turn down your loan > ℹ️ Try again! There are no banks in DeFi: lending is peer-to-peer and permissionless. - [ ] A central authority could freeze your funds > ℹ️ Try again! DeFi has no central authority that can freeze your funds. The real risks lie elsewhere, like errors in code. - [x] There may be an error in the code > ℹ️ Correct! DeFi runs on code, and an error or loophole in that code can be exploited.