What Is DeFi? DeFi And DEXs In Simple Terms
DeFi is short for decentralized finance. DeFi experienced an initial boom in 2020 and then another massive bull market in 2021! There are many use cases and interpretations of DeFi in the crypto economy. It’s an entirely new financial system built on blockchain rails.
At the heart of DeFi is the ability to transact and access financial services without relying on traditional institutions such as banks and credit providers. Users interact with a smart-contract-empowered service, using a non-custodial wallet to authorize and execute transactions. Essentially, DeFi facilitates permissionless and borderless financial access.
Decentralized exchanges (DEXs), on the other hand, are merely a way for users to buy, sell, and trade tokens. A DEX is generally considered safer because users retain custody of their assets, with transactions executed through smart contracts. In simple terms, this means the exchange does not take possession of the funds; it executes a swap and returns the desired coin or token to the wallet that initiated the transaction.
This is a very attractive option for crypto holders, as exchanges are known to get hacked from time to time, and using a DEX significantly reduces that risk. However, CEXs appear to be significantly safer in 2026. Leading exchanges have robust security measures, unlike in the earlier days of crypto.
Where Can Beginners Start With DeFi?
Numerous resources provide statistics on various DEXs and projects built on base-layer DeFi-enabled networks. Metrics such as total value locked (TVL) and market cap are available for users to review. Users and potential users can see how projects rank and how well they are used. One can also check whether a particular project has been audited to identify any code flaws that hackers could exploit.
Polygon Daily is a Twitter account that covers developments in the world of POL/Polygon DeFi and, more broadly, in POL/Polygon. DeFiLlama is perhaps the best DeFi tool providing DeFi-based analytics, metrics, and data. It’s an excellent tool for determining the health of a particular DeFi ecosystem.
What Exactly Is An AMM?
An example of a popular AMM is PancakeSwap, which operates on BSC and enables swaps of BEP20 tokens. All native tokens on BNB Smart Chain (BSC) follow the BEP-20 token standard. An automated market maker (AMM) provides a service that enables token swaps in a unique, decentralized way. Traditional exchanges connect potential buyers and sellers to facilitate and execute trades.
AMMs, on the other hand, enable trades via a liquidity pool. It is also important to note that many on-chain services can be accessed securely using a hardware wallet, providing an additional layer of protection for your digital assets. These pools receive capital from liquidity providers to facilitate trades and operate in a decentralized manner, unlike centralized exchanges. Liquidity providers, in turn, receive compensation in the form of fees charged to execute the trade/swap via the automated market maker.
Liquidity is provided through farming pairs and staking vaults. In essence, automated market makers keep the DeFi ecosystem alive, without which the entire ecosystem and economy would collapse. Essentially, an AMM allows people to trade crypto without a traditional order book or centralized exchange.
What Are The Advantages Of Trading On A DEX?
The most attractive aspect of DeFi and decentralized exchanges is the self-custody of funds! Utilizing centralized exchanges removes coins and tokens from your own personal custody and places them in the custody of the exchange. This ultimately means the exchange now holds your crypto.
Provided you can trust the relevant third-party exchange, it makes all the difference. However, exchanges can be hacked or otherwise exploited, leaving your coins permanently vulnerable. Binance remains the best centralized exchange thanks to its SAFU Fund, which provides a layer of protection for users who may fall victim to a hack or exploit.
A decentralized exchange, on the other hand, only removes custody from the holder for at most a few seconds. This time is obviously required to facilitate the transaction or swap. The holder quickly regains custody of the new coin or token they have chosen to receive.
Should Beginners Use A DEX Or A Centralized Exchange?
DEXs can be a little overwhelming for newcomers, especially since DeFi is a Web3 model that uses a distinct way of interacting and creating accounts. I would suggest starting with a trusted centralized exchange such as Binance or Bybit. Once familiar with different address formats and on-chain protocols, one can consider further exploration. Users should also remain vigilant against malicious smart contracts, wallet-draining scams, and phishing attacks.
What Are The Top DEXs & On-Chain Trading Platforms To Explore In 2026?
- Jupiter – Top Solana DEX/AMM
- JTX – On-chain trading platform
- Aster – DEX/on-chain trading platform
- PancakeSwap – Top BSC DEX/AMM with great yield opportunities
- Raydium – Top Solana DEX/AMM
- Biswap – BSC DEX/AMM that pays you to trade
- Uniswap – Top ETH DEX/AMM
Decentralized exchanges are also subject to risk, especially if you provide liquidity to pools and have surrendered custody of your funds to generate yield. Exploits, rug pulls, and impermanent loss should always be considered when providing liquidity. Learn more about JTX, a professional on-chain trading platform built on Solana and designed to bridge centralized trading with DeFi.
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