What Is DeFi?
DeFi is short for decentralized finance. It is the set of on-chain protocols that let people trade, lend, borrow, and earn yield by interacting with smart contracts instead of a bank or a custodial exchange. Users usually keep custody of assets in a wallet until they deposit or swap.
How DeFi Works
A DEX or AMM prices trades against a liquidity pool. Lending protocols match suppliers and borrowers with over-collateralization and liquidations. Other protocols issue derivatives, aggregate routes, or wrap assets across chains. Rules live in code, but oracles, admin keys, bridges, and smart-contract bugs are still points of failure.
Yield figures such as APY can come from trading fees, borrower interest, token incentives, or some mix. Incentives can disappear; fees and impermanent loss do not.
Why It Matters for Traders
DeFi changes both the tools and the risks. You can trade or hedge on-chain without depositing to a CEX, but you take contract, oracle, and key-management risk. Journaling a DeFi trade should record the protocol, pool or market, fees, and any incentive token, because those details change P&L.
How Perps Traders Use This
On-chain perps and funding venues are part of the same derivatives landscape as CEX books, with different liquidation and collateral rules. If you hedge or source liquidity in DeFi, size for pool depth and slippage, not for a CEX last price.
Common Mistakes
- Chasing advertised APY without separating incentives from sustainable fees.
- Skipping contract and oracle risk because the interface looks simple.
- Treating a wallet interaction as reversible, the way a CEX cancel is.
