DeFi tokens: from basics to earning strategies in decentralized finance

Why DeFi is Revolutionizing the Financial Industry

Decentralized Finance (DeFi) represents a radical shift in how people interact with money and financial services. Unlike traditional banking systems, where all intermediary functions are performed by centralized institutions, DeFi builds financial services based on blockchain technology and smart contracts, completely eliminating middlemen.

The scale of this phenomenon is impressive: at its peak in December 2021, the total value locked (TVL) in DeFi protocols exceeded $256 billion, nearly quadrupling in a year. However, the true revolution lies not only in the numbers but in the fact that DeFi opens financial tools to 1.7 billion adults who remain outside the traditional banking system.

DeFi Architecture: How Decentralized Systems Work

DeFi operates thanks to smart contracts — self-executing programs recorded on the blockchain. When certain predefined conditions are met (for example, the user has provided the necessary collateral), the smart contract automatically executes the specified actions without any human intervention or delays.

Ethereum and its dominance in DeFi

Ethereum has become the number one platform for DeFi thanks to its Ethereum Virtual Machine (EVM) — a computing core that allows developers to write complex financial applications in Solidity and Vyper. Today, out of 202 existing DeFi projects, 178 are built on Ethereum.

Competitors are not resting: alternative platforms like Solana, Polkadot, and Cardano offer their own solutions, but Ethereum maintains its leadership due to network effects and being a pioneer. The upcoming ETH 2.0 upgrade could further strengthen its position through the Proof-of-Stake mechanism and sharding technology.

The Three Pillars of the DeFi Ecosystem

1. Decentralized Exchanges (DEX) and Token Trading

Decentralized exchanges enable users to trade crypto assets without the need for KYC procedures and without geographical restrictions. As of June 2023, the total value locked across all DEXs reached over $26 billion.

There are two main types of DEX architecture:

Order book-based exchanges — mimic the model of traditional centralized exchanges with an open order book for buy and sell orders.

Pool-based exchanges — use automated market makers (AMM), which apply mathematical algorithms to determine prices. Users can swap one token pair at a time, providing liquidity in exchange for rewards.

2. Stablecoins: Anchors in a Volatile Market

Stablecoins solve the critical problem of crypto market volatility. These tokens are pegged to stable assets (fiat currencies, commodities, or maintained by algorithms) and ensure predictable value.

Over five years, the stablecoin market has grown to $146 billion in market capitalization. Current data shows:

• USDC (fiat-backed): $76.58B
• DAI (crypto-backed): $4.24B
• PAXG (gold-backed commodity stablecoin): $1.64B

Stablecoins are not just a means of storing value. They serve as the foundation of the entire DeFi ecosystem, providing liquidity and allowing users to minimize risk when participating in other DeFi services.

3. Lending Markets and Their Scale

Lending remains the largest segment of DeFi. As of May 2023, lending protocols manage over $38 billion — nearly 50% of the total TVL across all DeFi ($89.12 billion).

The revolution in DeFi lending lies in speed and accessibility: a loan can be obtained in three minutes, with just a wallet address and sufficient collateral, without credit checks or bureaucracy.

DeFi Tokens: The Driving Force of the Ecosystem

All DeFi applications interact through special tokens. They can be divided into several categories:

Governance tokens (Governance tokens) — give holders voting rights in DeFi protocols. Holders determine fee parameters, protocol changes, and treasury distribution.

Liquidity tokens (LP tokens) — are received when users contribute assets to liquidity pools. They represent a share of the pool and generate passive income.

Reward tokens (Reward tokens) — issued by protocols as incentives for users providing liquidity or taking loans.

Platform tokens (Platform tokens) — used for paying fees and accessing features (for example, ETH on Ethereum).

Advantages of DeFi over Centralized Finance

Transparency without compromises

In DeFi, all processes and rates are determined by transparent consensus, not hidden algorithms of a central authority. This eliminates a single point of failure and makes the system resistant to manipulation.

Speed and accessibility

International payments via DeFi are processed in minutes instead of days required by the banking system. DeFi markets operate 24/7 without weekends or closing hours, ensuring constant liquidity.

Full control over assets

Users hold the keys to their assets and are fully responsible for their security, eliminating the risk of mass bank hacks.

Ways to Earn Income through DeFi

Staking and passive income

Staking allows earning just by holding cryptocurrencies that use the Proof of Stake mechanism. Staking pools act like savings accounts, distributing rewards among participants.

Yield farming: active liquidity trading

This is a more complex strategy where users deposit two cryptocurrencies into a pool for trading. AMM uses these assets to provide liquidity, and users earn a percentage of each trade plus additional reward tokens.

Liquidity mining via LP tokens

Liquidity providers receive LP tokens, which can be used to generate additional income through staking these tokens in other protocols — creating a “nesting doll” of earning opportunities.

Crowdfunding and early project investments

DeFi allows retail investors to participate in funding new projects on equal footing with institutional players, receiving tokens in exchange for investments.

Critical Risks: What to Watch For

Smart contract vulnerabilities

Even small bugs in code can lead to huge losses. According to Hacken, in 2022, hacker attacks on DeFi resulted in losses of over $4.75 billion — an increase compared to $3 billion in 2021.

Fraud and rug pulls

High anonymity makes DeFi attractive to scammers. Schemes like “rug pull” (developers steal funds and disappear) and “pump-and-dump” schemes remain serious problems.

Temporary impermanent loss (

When providing liquidity to volatile pairs, token prices can diverge so much that you incur a loss even if the total pool value increases. This risk cannot be fully eliminated.

) Leverage and liquidation

Some platforms offer leverage up to 100x, attracting speculators, but sharp price movements can lead to complete loss of funds.

Regulatory uncertainty

The entire DeFi ecosystem exists in a legal gray area. New regulations could significantly change the industry landscape.

The Future of DeFi: Where the Industry is Heading

DeFi is moving from simple financial primitives to complex ecosystems involving derivatives, asset management, and insurance. Ethereum will continue to dominate thanks to its first-mover advantage, but alternative platforms will actively compete for market share.

The key to sustainable DeFi development lies in balancing innovation and security, accessibility and user protection from risks.

Main Takeaways

1. DeFi is transforming financial services: opening them to billions without banking access
2. Tokens are the lifeblood of the ecosystem: governance, liquidity, and reward tokens work together to create incentives
3. Ethereum and smart contracts — the current gold standard, though competition is growing
4. Cross-border transactions are faster, cheaper, and more transparent than in the banking system
5. Decentralized exchanges, stablecoins, and loans form the foundation
6. Earning methods are diverse: from simple staking to complex farming
7. Risks are significant: vulnerabilities, scams, volatility require caution
8. The future is promising but uncertain: new applications and regulations are expected

As blockchain technology develops, DeFi will continue to evolve, providing new opportunities for financial inclusion and creating an alternative infrastructure that is censorship-resistant and independent from centralized control.