Friends, DeFi, DeFi, DeFi... Do you hear this word every day, but when asked to explain it, you find it a bit hard to articulate? Don't worry, today I'll explain it clearly.
1. What is DeFi?
Think about the money you earn with hard work: you deposit it in a bank and get 1% interest for a year, while the bank turns around and lends it out at 5%, netting a 4% profit margin. This is the logic of traditional finance.
The emergence of DeFi allows you tobypass banks as intermediaries,directly lend money to others, participate in trading to earn fees, and stake to earn returns.
No banks, no approvals; everything relies on code and on-chain contracts to execute.Trust the code, not intermediaries..Everyone can participate, and everyone has the chance to make money. Of course, there are also many pitfalls. Come on, follow me as we break down how DeFi works and whether it's worth participating.
2. How big is DeFi?
Let me give you a shocking piece of data:The current total locked value (TVL) in DeFi exceeds $110 billion..
In the bull market peak of 2021, it once surged to $180 billion, then dropped to $50 billion during the bear market, and is now slowly climbing back.Regardless of whether it rises or falls, this new financial experiment in DeFi is still vibrant and hasn't been squashed, indicating that it indeed has some substance.
3. How exactly to play DeFi?
I have summarized four classic ways to play; mastering these will essentially get you started.
1️⃣ Decentralized Lending - Taking Aave as an example.
You have ETH, don't want to sell it, but need some cash. Traditional banks don't recognize ETH at all, but onAaveand similar on-chain lending platforms, you can deposit ETH as collateral to borrow stablecoins (like USDC) to spend.
Of course, to borrow money, you must collateralize more than the loan amount; for instance, if you want to borrow $1,000, you need to pledge $1,500 worth of ETH.
Aave controls risks through smart contracts. If the value of your collateral drops too much, the system will force a liquidation auction to ensure the platform doesn't lose money.
As of 2025, Aave's locked assets reached $24 billion, firmly securing its position at the top of DeFi. Storing USDC earns about 4% annually, while borrowers pay higher interest; this is Aave's profit model.
It also has a flashy operation called flash loans, which don't require collateral and allow borrowing large amounts of funds for arbitrage within a single block. Experts can extract sky-high profits with it, but beginners should avoid it due to its high difficulty.
2️⃣ Decentralized Exchanges - Taking Uniswap as an example.
Want to swap tokens? Uniswap is the on-chain token exchange machine.
Users provide liquidity (LP), for example, by depositing half ETH and half USDC into the pool. When someone trades, you earn a share of the fees. No need to place orders, no intermediaries; the price is automatically calculated by the liquidity pool.
The core mechanism of Uniswap.
Uniswap currently has a cumulative trading volume exceeding$2 trillion, definitely a big brother in DeFi.
However, being an LP carries risks, such as impermanent loss; if prices fluctuate too much, the fees earned may not cover the losses. Ordinary users are more suited to dosmall token swaps,which are simple and convenient, with no need to register or complete KYC.
3️⃣ Liquid Staking - Taking Lido as an example.
After ETH transitions to PoS, staking can yield returns, but the threshold is high and liquidity is poor. However, Lido has solved this problem.
You stake your ETH with Lido, and they issue you stETH, which acts as a 'staking certificate' and allows you to continue participating in other DeFi operations. The yield is 3% to 4% annually, and it can be traded or redeemed at any time, offering much more flexibility.
Lido currently holds over 28% of the ETH staking volume, firmly sitting at the top of the LSD (Liquid Staking Derivative) track.
4️⃣ Decentralized Stablecoins - Taking DAI as an example.
The digital dollar in the crypto world is not just USDT and USDC, but also a decentralized representative - DAI.
DAI is not directly exchanged from a company's dollar reserves; it is generated through over-collateralizing crypto assets. Users collateralize ETH, BTC, etc., with a 1.5 times collateralization ratio to mint DAI, which remains stable at around $1.
Finally, don't just look at the profits; you need to know these pitfalls.
Contract hacking: If the code has vulnerabilities, hackers can steal all the funds.
Forced liquidation: If the collateral drops too much, the system will automatically auction.
Price crash: High volatility in coin prices may result in returns not being enough to cover losses.
Runaway risk: New projects are prone to raising funds and disappearing.
So, when choosing DeFi projects, start with the top projects and avoid being greedy for high returns.
