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2 | 2 |
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3 | 3 | ## Introduction
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4 | 4 |
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5 |
| -**Decentralized Finance (DeFi)** is an umbrella term for a broad category of financial applications and services built on top of [[Blockchain]] technology, primarily [[Ethereum]]. DeFi aims to recreate and improve upon traditional financial systems (TradFi) by using decentralized infrastructure, [[Smart Contract]]s, and open protocols, thereby reducing reliance on central intermediaries like banks, brokerages, or exchanges. |
| 5 | +**Decentralized Finance (DeFi)** is an umbrella term for a broad category of financial applications and services built on top of Blockchain technology, primarily [[Ethereum]]. DeFi aims to recreate and improve upon traditional financial systems (TradFi) by using decentralized infrastructure, [[Smart Contract]]s, and open protocols, thereby reducing reliance on central intermediaries like banks, brokerages, or exchanges. |
6 | 6 |
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7 |
| -- **Importance/Purpose:** DeFi seeks to build a more open, transparent, permissionless, and accessible financial system. It allows users to lend, borrow, trade, earn interest, and manage assets without needing to trust a central authority, directly interacting with smart contracts through their crypto [[Wallet|wallets]]. |
| 7 | +- **Importance/Purpose:** DeFi seeks to build a more open, transparent, permissionless, and accessible financial system. It allows users to lend, borrow, trade, earn interest, and manage assets without needing to trust a central authority, directly interacting with smart contracts through their crypto wallets. |
8 | 8 | - **Target Audience:** Crypto-savvy users, investors, traders, developers, and those seeking alternatives to traditional financial services.
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9 | 9 |
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10 | 10 | ## Core Concepts & Mechanism
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19 | 19 |
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20 | 20 | ### Common DeFi Applications
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21 | 21 |
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| -- **[[Decentralized Exchange (DEX)|Decentralized Exchanges (DEXs)]]:** Platforms like Uniswap or Sushiswap that allow users to trade cryptocurrencies directly peer-to-peer using automated market makers (AMMs) or order books, without needing a central custodian. (e.g., [[Uniswap]], [[Curve Finance]]) |
23 |
| -- **Lending and Borrowing Platforms:** Protocols that allow users to lend their crypto assets to earn interest or borrow assets by providing collateral. (e.g., [[Aave]], [[Compound Finance]]) |
24 |
| -- **[[Stablecoin]]s:** Cryptocurrencies pegged to the value of fiat currencies (e.g., USDC, DAI) or other assets, providing stability in the volatile crypto market. [[MakerDAO]] is a key example for the DAI stablecoin. |
| 22 | +- **Decentralized Exchanges (DEXs):** Platforms like Uniswap or Sushiswap that allow users to trade cryptocurrencies directly peer-to-peer using automated market makers (AMMs) or order books, without needing a central custodian. (e.g., Uniswap, Curve Finance) |
| 23 | +- **Lending and Borrowing Platforms:** Protocols that allow users to lend their crypto assets to earn interest or borrow assets by providing collateral. (e.g., Aave, Compound Finance) |
| 24 | +- **[[Stablecoin]]s:** Cryptocurrencies pegged to the value of fiat currencies (e.g., USDC, DAI) or other assets, providing stability in the volatile crypto market. MakerDAO is a key example for the DAI stablecoin. |
25 | 25 | - **Yield Farming & Liquidity Mining:** Practices where users provide liquidity to DeFi protocols (e.g., by depositing assets into liquidity pools) in exchange for rewards, often in the form of the protocol's governance token.
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26 | 26 | - **Derivatives:** Platforms offering decentralized trading of financial derivatives like options, futures, and synthetic assets. (e.g., Synthetix, dYdX)
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27 | 27 | - **Insurance:** Protocols that offer decentralized insurance products to cover risks like smart contract vulnerabilities or stablecoin de-pegging. (e.g., Nexus Mutual)
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28 |
| -- **Prediction Markets:** Platforms where users can bet on the outcome of future events. (e.g., [[Augur]], Polymarket) |
| 28 | +- **Prediction Markets:** Platforms where users can bet on the outcome of future events. (e.g., Augur, Polymarket) |
29 | 29 |
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30 | 30 | ## Use Cases & Implications
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31 | 31 |
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41 | 41 | ### Limitations & Challenges of DeFi
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42 | 42 |
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43 | 43 | - **Smart Contract Risk:** Bugs or vulnerabilities in smart contract code can lead to significant losses of funds through hacks or exploits.
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44 |
| -- **Scalability Issues:** Many DeFi applications, especially on Ethereum, can suffer from high [[Transaction Fees]] (gas fees) and slow transaction times during periods of network congestion. |
| 44 | +- **Scalability Issues:** Many DeFi applications, especially on Ethereum, can suffer from high Transaction Fees (gas fees) and slow transaction times during periods of network congestion. |
45 | 45 | - **User Experience (UX):** Can be complex and intimidating for beginners compared to traditional financial applications or [[Centralized Exchange (CEX)|CEXs]].
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46 | 46 | - **Regulatory Uncertainty:** The regulatory landscape for DeFi is still evolving and often unclear, posing risks for users and developers.
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47 | 47 | - **Oracle Risk:** DeFi protocols often rely on [[Oracle|oracles]] to bring external data (like asset prices) on-chain. If these oracles are compromised or provide inaccurate data, it can lead to exploits.
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50 | 50 |
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51 | 51 | ## Related Concepts
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52 | 52 |
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53 |
| -- [[Blockchain]] |
54 | 53 | - [[Smart Contract]]
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55 | 54 | - [[Ethereum]] (the primary platform for DeFi)
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56 |
| -- [[Decentralized Exchange (DEX)]] |
57 |
| -- [[Automated Market Maker (AMM)]] |
58 |
| -- [[Liquidity Pool]] |
| 55 | +- Liquidity Pool |
59 | 56 | - [[Yield Farming]]
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60 | 57 | - [[Stablecoin]]
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61 | 58 | - [[Oracle]]
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62 |
| -- [[Governance Token]] |
63 |
| -- [[Wallet]] |
| 59 | +- Governance Token |
| 60 | +- Wallet |
64 | 61 | - [[Web3]]
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