Learn about different DeFi protocols, their purposes, and how to evaluate their safety.
DeFi protocols can be organized into several main categories based on their function.
Platforms that enable peer-to-peer trading of tokens without a central authority managing the order book.
Protocols allowing users to earn interest on deposits and borrow assets against collateral.
Protocols that provide liquidity providers and stakers with rewards for participation.
Platforms for trading derivatives, perpetual contracts, and options on-chain.
Protocols that automatically manage user portfolios and rebalance positions.
Protocols designed to manage and mitigate risks in DeFi.
Understanding how different types of DEX operate.
AMMs use a mathematical formula to determine prices and facilitate trades. The most common formula is x*y=k, where x and y are token quantities in the pool, and k is a constant.
Traditional order books where buyers and sellers create limit orders on the blockchain.
Advantages: More efficient pricing, lower slippage, familiar interface
Disadvantages: Require significant liquidity, more complex to use, higher gas costs
The annual return on deposits including compound interest. Higher APY means better returns but often implies higher risk.
The maximum percentage of collateral value you can borrow. Higher LTV means more leverage but greater liquidation risk.
Total amount of assets deposited in the protocol. Generally, higher TVL indicates more established and mature protocol.
When collateral value drops, protocol liquidates positions to protect lenders. Liquidation penalties apply to borrowers.
| Protocol | Type | Governance | Risk Level |
|---|---|---|---|
| Aave | Lending/Borrowing | AAVE Token | Low-Medium |
| Compound | Lending/Borrowing | COMP Token | Low-Medium |
| MakerDAO | Stablecoin | MKR Token | Medium |
| Curve | Stablecoin DEX | CRV Token | Low |
How to evaluate protocol safety and trustworthiness.
Characteristics:
Characteristics:
Characteristics:
How to conduct thorough research before using a DeFi protocol.
What problem does the protocol solve? Is it clearly defined? Read the whitepaper and documentation to understand the core concept.
Look for audits from reputable firms (OpenZeppelin, Chainsecurity, Trail of Bits). Read audit reports to understand any issues found and their fixes.
If available, review the smart contract code on GitHub. Look for common vulnerabilities and best practices. You can use tools like Etherscan to verify on-chain code.
Understand the protocol's token: total supply, distribution, inflation rate, and use cases. Unsustainable tokenomics can lead to protocol failure.
Research the team members' backgrounds and track records. Understand how the protocol makes decisions and who has control through governance.
Check discussions on Twitter, Discord, and Reddit. Look for red flags like excessive hype without substance or aggressive marketing tactics.
Higher TVL and longer history generally indicate more established protocols. Check for any past hacks or significant issues.
Only commit significant capital after thorough research and testing with small amounts. Understand gas fees and transaction costs in advance.