What Is DeFi? DeFi And DEXs In Simple Terms
DeFi is an abbreviation for decentralized finance. DeFi experienced an initial boom in 2020 and has consequently experienced 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.
DEXs, on the other hand, are merely a way for users to buy, sell, and trade tokens. A “Decentralized Exchange” is safer because, once again, transactions take place via a smart contract. 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.
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 TVL, which stands for “total value locked,” and market cap are available for users to peruse. 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 determine whether there are any code flaws that could be exploited by hackers.
Polygon Daily is actually a Twitter account that details what is happening in the world of POL/Polygon DeFi, as well as POL/Polygon in general. 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. Any token running on BSC will inevitably be a BEP20 token. 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. These pools receive capital from liquidity providers in order 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. What this ultimately means is that the exchange now holds your Crypto.
Provided you can trust the applicable third-party exchange, it makes all the difference, though. 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 a few seconds at most. This time is obviously required to facilitate the transaction or swap. Custody is quickly regained by the holder in the form of the new coin or token that they have chosen to receive.
What Are The Top DEXs To Explore?
- Jupiter – Top Solana DEX/AMM
- 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.
