How does decentralized finance work and what can you do with it?

The financial industry is undergoing a transformation that can’t be ignored. Traditional banks are losing their monopoly on trust, giving way to flexible, technology-driven solutions. One of the most notable phenomena of this shift is decentralized finance (DeFi). This isn’t a passing trend, but a fundamental change in how we handle money: without banks, without intermediaries, with full user-side control.

In this article, we explain what DeFi is and how to borrow, earn, or provide liquidity within it. No heavy jargon — just the essentials.

What DeFi is in simple terms

DeFi (short for Decentralized Finance) refers to financial services built on blockchain, typically Ethereum or similar networks. The DeFi world is vast: you can manage funds, take out loans, invest, earn passive income, and swap tokens — all without a bank or broker.

Key advantages of DeFi:

• Speed — transactions settle almost instantly
• Accessibility — you only need the internet and a crypto wallet
• Transparency — all data is public and verifiable on-chain
• Control — you decide what to do with your money

There are also risks: volatility, smart-contract bugs, and, unfortunately, hacks.

Simply put, DeFi lets you be your own bank — but remember, that also makes you responsible for your funds’ security.

How to borrow in DeFi (Lending & Borrowing)

Imagine you hold crypto but don’t want to sell it. You can deposit it as collateral and borrow another asset against it. It’s like a loan — without a bank.

How it works:

1. You deposit your crypto (e.g., ETH) into a platform.
2. It’s locked as collateral.
3. In return, you receive another asset (e.g., USDC) that you’re free to use.

Popular services for borrowing include Aave and Compound.

Why do this? For example, to get liquidity for new investments without selling valuable assets. You can also deploy borrowed funds for farming or trading.

How to earn in DeFi (Staking & Yield Farming)

DeFi also enables passive income. Two common approaches:

1. Staking

   You lock your coins in the network and receive rewards for helping secure the blockchain. It’s similar to a bank deposit — without the bank and with potentially higher yields.

2. Farming

   You supply assets to special liquidity pools and receive rewards in return — often new project tokens or interest paid in crypto.

Main differences:

Staking is about supporting the network; farming is about earning from providing liquidity.

Returns can exceed those of traditional banks, but risks are higher too: technical failures, unstable tokens, and market swings.

How to provide liquidity (Liquidity Pools)

Decentralized exchanges (DEXs) operate without traditional order books of buyers and sellers. Their backbone is liquidity pools. Examples include Uniswap and PancakeSwap.

The principle:

You deposit two assets (e.g., ETH and USDT) into a shared pool. Other users swap these tokens on the DEX, and you earn a share of the trading fees from each transaction.

It’s important to note there are many pools with varying returns. There’s also the risk of impermanent loss — a temporary loss in value arising from price changes between the tokens in the pair. With volatile markets, your position may underperform simply holding.

Tips from Kursoff

1. Start small. Experiment with minimal amounts to learn the mechanics.
2. Use reputable platforms. Don’t fall for promises of “astronomical” yields.
3. Diversify. Don’t put everything into a single project or token.
4. Invest only what you can afford to lose. Crypto carries high risk.

Conclusion

DeFi is a next-generation financial landscape. In it, you can borrow against collateral, earn via staking or farming, provide liquidity, and collect a share of DEX fees.

It’s a world of great potential — with its own pitfalls. Start small, learn the mechanics, avoid rushing, and you’ll gradually be able to use DeFi effectively in your personal finance.