Blockchain
A shared record of balances and transactions. Ethereum is one network; assets on different networks are not automatically interchangeable.
VALUE / A FIELD GUIDE
Understand the
flow of value.
Your crypto can do more than sit in a wallet. Learn what it can do, how it works, and what you take on when you use it.
DeFi means decentralized finance: financial tools built with programs on blockchains. People use them to exchange assets, lend, borrow, and provide liquidity.
Start with the foundationsPLAIN LANGUAGE. VISIBLE CONNECTIONS.Free to read · No wallet needed
01 / THE FOUNDATIONS
Four pieces. Different jobs.
Start here if crypto feels like a wall of unfamiliar words.
Token
A unit recorded on a network. ETH, a stablecoin, and a token representing a deposit can have very different purposes and risks.
Wallet
Software or hardware that helps you use an account and authorize actions. Your assets are recorded onchain; a self-custody wallet lets you control the keys.
Protocol
A system of rules and smart contracts that performs a job, such as lending. The website is an interface to that system.
Open access still involves trust.
Smart contracts can fail, assets can lose value, and some systems have administrators or centralized dependencies. A familiar-looking website does not establish safety.
Read the foundations: Ethereum.org: DeFi · Wallets
02 / WHAT YOU CAN DO
Choose an interaction.
Follow what happens.
Each action has a purpose, a source of value, and a trade-off.
LENDING
Make an asset available to borrowers.
You supply tokens to a lending pool. Borrowers pay interest, and part of that interest accrues to suppliers. The rate changes as borrowing demand and available funds change.
YouSupply tokens
Lending poolAllocates liquidity
BorrowersPay interest
Interest accrues to suppliers
- Where yield comes from
- Borrower interest; some markets add separate token incentives.
- What to understand
- The deposited asset can fall in price, and a contract failure or bad debt can cause losses.
- How you leave
- Withdraw subject to available liquidity and any collateral securing your own loans.
Read the mechanics: Aave: supply · withdraw
BORROWING
Access another asset against collateral.
You deposit an asset as security and borrow against part of its value. You still have exposure to your collateral, while taking on a debt that grows with interest.
YouDeposit collateral
ProtocolApplies loan limits
Your loanInterest accrues
Repay debt to release the collateral securing it
- Why people do it
- To access liquidity while retaining exposure to the collateral. Borrowing itself is not income.
- What to understand
- If collateral falls or debt grows too far, liquidation can sell part of your collateral with a penalty. Borrow rates can rise.
- How you leave
- Repay the required debt plus interest before withdrawing collateral that secures it.
Read the mechanics: Aave: borrowing · liquidation
SWAPPING
Exchange one token for another.
A decentralized exchange can route a trade through liquidity pools. You authorize spending and the swap through your wallet, and receive the output asset if the transaction succeeds.
Token AYour input
Pool or routeExecutes the swap
Token BYour output
Review the quoted output, fees, and minimum received
- Why people do it
- To change exposure or obtain an asset needed for another interaction.
- What to understand
- A thin pool or large trade can produce a poor price. A matching ticker does not prove that a token is authentic.
- How you leave
- The swap is complete when it settles. Swapping back is a new trade at the price available then.
Read the mechanics: Uniswap: liquidity pools
LIQUIDITY PROVIDING / LP
Supply the assets other people trade.
You put assets into a pool and receive a position representing your share. Traders use that liquidity; eligible providers earn trading fees. Some protocols also offer token rewards.
Your assetsCreate a position
Liquidity poolEnables swaps
TradersPay swap fees
Fees can accrue while your liquidity is active
- Where yield comes from
- Trading fees and, where offered, separate incentives. Token quantities change as people trade.
- What to understand
- You can underperform holding the assets separately. Concentrated positions stop earning swap fees outside their chosen price range.
- How you leave
- Remove liquidity and collect any available fees. You may receive a different asset mix than you deposited.
Read the mechanics: LP basics · price ranges · impermanent loss
NETWORK STAKING
Help a proof-of-stake network operate.
Validators commit assets to help run the network and receive rewards for their work. Pooled and liquid staking services let people participate without operating their own validator.
Staked assetsCommitted capital
ValidatorsPropose and attest
NetworkRewards participation
Rewards vary; services may take a fee
- Where yield comes from
- Network rewards and applicable transaction-related revenue.
- What to understand
- Penalties, slashing, provider risk, and withdrawal queues. Liquid staking tokens can trade away from their underlying redemption value.
- How you leave
- Use the relevant withdrawal process or sell a liquid staking token at its available market price.
Read the mechanics: Ethereum.org: staking
AUTOMATED VAULTS
Delegate the steps of a defined strategy.
A vault can deposit into other protocols, collect rewards, and reinvest them. Its share token represents a claim on the strategy's assets. Read what the specific vault actually does.
Your depositReceives vault shares
VaultRuns instructions
StrategyUses other protocols
Harvested rewards may be reinvested by the vault
- Where yield comes from
- The underlying strategy. Automation does not create a new source of return by itself.
- What to understand
- Underlying asset and protocol risks, plus the vault's contracts, fees, and any borrowing it uses.
- How you leave
- Redeem shares according to the vault's withdrawal mechanics and available liquidity.
Read the mechanics: Beefy: vaults · underlying strategies
These are examples of how the tools work. Availability, fees, and parameters vary by network and product.
03 / UNDERSTAND THE RETURN
More tokens.
A different question from more value.
Separate the quantity you own from the price someone will pay for it.
Ask who is paying you.
A borrower pays interest. A trader pays a fee. A network pays for validator work. A protocol may distribute incentives to attract deposits.
Those incentives can shrink or lose value. A high displayed rate tells you very little until you understand its source, its assumptions, and the asset you receive.
APR annualizes a rate without compounding.
APY includes an assumed compounding effect.
A changing rate is not a promise for the next year. Check whether the figure includes incentives and which fees it already subtracts.
More on rates and compounding: Beefy strategy documentation
AN ILLUSTRATION, NOT A LIVE RATE
1 ETH becomes 1.05 ETH.
Assume you earn 5% in ETH over one year. What happens if ETH's price changes?
Starting value100
Ending value105
5% more ETH. 5% more value at an unchanged ETH price.
Value is indexed to 100 at the start, measured in the same currency. Fixed illustrative token yield; fees, taxes, and protocol losses are excluded.
100 × 1.05 × 1.00 = 105
04 / THE LANGUAGE
The terms, translated.
Open a term, then tap its question for a practical answer.
Access & assets
Self-custody
You control the keys that authorize actions. You also take responsibility for keeping access secure.
Who can move these assets?
Anyone with your private key or recovery phrase can authorize transactions from the related account. A contract with a token allowance can also spend that token within its permission. Check both who has access to your wallet and which spending permissions you have granted.
Learn more: Ethereum wallets · Token permissions
Recovery phrase
A secret set of words used to restore many wallets. Anyone with it may control the related accounts. Never give it to a website or another person.
Is my backup private and recoverable?
A useful backup is complete, in the correct word order, and stored somewhere you can access if your device is lost. Keep it offline and away from other people; avoid screenshots or cloud notes. Follow your wallet's official backup instructions. Never enter the phrase into a website offering to verify it.
Learn more: Wallet security
Gas
The network fee for processing a transaction. On Ethereum, it is paid in ETH. Keep enough of the correct network's fee asset to exit a position, too.
What will entry and exit cost?
Add the estimated network fees for each step: any approval, swap, deposit, and eventual withdrawal. Include any fees charged by the app or protocol. Estimates can change before you exit. As an illustration, $5 of total costs on $100 is 5% of the starting amount before any return. Keep enough of the network's fee asset for the exit.
Learn more: Network fees · Vault fees
Approval / allowance
Permission for a contract to spend a token, up to a limit. Connecting a wallet, granting an allowance, and making a deposit are distinct actions.
What am I authorizing, and for how much?
Read the token, spending limit, network, and spender address in the approval request. An unlimited allowance can cover future balances of that token too. A limited allowance narrows that permission. Disconnecting the website does not revoke an existing token allowance; revocation is a separate on-chain action.
Learn more: Token approvals and revocation
Stablecoin
A token designed to track a reference value, often a currency. The peg can fail; reserves, redemption rights, and issuer controls vary.
What supports its value?
Identify what backs the token: cash and other reserves, crypto collateral, or an algorithmic mechanism. Read the issuer's or protocol's documentation, reserve disclosures, and redemption rules. Ask who can redeem, for what, and under which conditions. A $1 target alone does not establish that a token can always be sold or redeemed for $1.
Learn more: How stablecoins work
Bridge
A system for moving value or messages between networks. It adds its own dependencies, and may give you a different token representation on arrival.
What exactly will I receive, and where?
Check the destination network, receiving address, and exact token in the bridge preview. It may be a wrapped representation with different risks from the original asset. Review the amount after fees, expected arrival time, and route back. You may also need the destination network's fee asset to use what arrives.
Learn more: Blockchain bridges
Sources: wallets, security, gas, stablecoins, bridges.
Positions & returns
Collateral
An asset pledged to secure a loan. Its value affects how much you can borrow and whether your debt can be liquidated.
What happens if its price falls?
If other factors stay the same, falling collateral value reduces the buffer supporting your debt. At the protocol's liquidation threshold, collateral can be sold to repay debt, with an additional liquidation cost. Repaying debt or adding eligible collateral can improve the buffer; neither is automatic.
Learn more: Aave liquidations
Health factor / liquidation
On Aave, health factor compares adjusted collateral value with debt. Below 1, a position becomes eligible for liquidation. Other protocols may use different measures.
How much room is there before liquidation?
Check the position's current health factor and liquidation thresholds in the protocol. A value just above 1 leaves little buffer on Aave. That buffer changes with collateral prices, debt prices, and accrued interest. Review how a price move would affect the whole position; today's number is not a guarantee.
Learn more: Health factor and liquidation
Impermanent loss
The shortfall versus separately holding the deposited assets, caused by an AMM position's changing asset mix as relative prices move. Fees may offset it, but recovery is not guaranteed.
Am I beating simply holding the assets?
Compare your position's current value, including earned fees and rewards after costs, with what your original token amounts would be worth if you had kept them in your wallet. Use the same time period and currency. A positive fee total alone does not mean liquidity provision outperformed holding.
Learn more: Impermanent loss explained
Concentrated liquidity / range
Liquidity allocated to a selected price interval. Outside that interval, it stops earning swap fees; it can become entirely one of the two assets.
What do I hold if the price leaves my range?
The liquidity position becomes entirely one of the pair's tokens. Which one depends on the direction of the price move and how the price is quoted. Check both range boundaries in the app's position preview. While out of range, that liquidity earns no swap fees; accrued fees remain separate.
Learn more: Concentrated liquidity
Harvest / compound
Harvesting collects rewards. Compounding puts earnings back to work. A strategy may sell reward tokens and buy more of the underlying assets along the way.
Which token is earned, and which is kept?
Check the strategy's reward token and what it does after harvesting. You might claim that token directly, or a vault might sell it to buy more of the deposited assets. In the second case, the rewards increase the underlying position instead of arriving in your wallet as reward tokens.
Learn more: Vault strategies
Sources: Aave liquidation, impermanent loss, ranges, vault shares, harvesting.
05 / YOUR FIRST STEPS
Learn one complete interaction.
Being able to explain a position is more useful than being able to click “deposit.”
- 01
Describe the purpose.
Choose one interaction above. Explain what goes in, what comes out, who pays a return, and what could reduce your claim.
- 02
Understand the route.
Identify the network, token, wallet, and protocol. Read the official documentation and the withdrawal process before funding anything.
- 03
Review the permission.
Check the domain, recipient, spending allowance, and transaction details. Keep recovery information private. Stop if you cannot explain what you are signing.
- 04
Observe the full cycle.
If you choose to try an interaction, use only an amount you can afford to lose and account for fees. Confirm the transaction and understand how to withdraw before increasing exposure.
Wallet and transaction guidance: Ethereum.org: security. Product access and financial obligations depend on your location.