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The risks DeFi adds that a wallet doesn't have
- Smart-contract bugs — a single flaw can drain a protocol. Audits reduce but never eliminate this risk.
- Impermanent loss — when pool prices diverge, LPs can end up worse off than simply holding the tokens.
- Oracle manipulation — protocols relying on price feeds can be attacked if those feeds are spoofed.
- Liquidation — borrowed positions can be liquidated if collateral value drops, sometimes with penalties.
- Composability / cascading failures — protocols stacked on each other can fail together.
- Regulatory uncertainty — rules vary by jurisdiction and are still evolving.
Yield isn’t free money
Every yield comes from somewhere — borrower demand, fees, inflation of a reward token, or risk premium. If you can’t explain where the yield comes from, you’re probably the source of someone else’s.
Go deeper — TVL and the "money legos" idea
TVL (Total Value Locked) measures assets held in a protocol’s contracts and is a rough gauge of adoption. DeFi’s "composability" means protocols can be combined like Lego bricks — a deposit can be used as collateral, the borrowed asset lent again, the receipt token staked elsewhere… each step adds leverage and risk.
Money legos, stacked
Key takeaways
A one-page summary of DeFi & Web3 Concepts. Print it for quick reference.
- DeFi = financial services built from smart contracts — no bank/broker; the protocol’s code enforces the rules.
- Building blocks: lending protocols, AMMs/DEXes (liquidity pools), yield, staking, governance tokens.
- AMMs price via a pool formula (e.g. constant-product x·y=k); LPs earn fees for supplying liquidity.
- Risks: smart-contract bugs, impermanent loss, oracle manipulation, liquidation, composable/cascading failures, regulatory uncertainty.
- Every yield comes from somewhere — if you can’t explain it, you may be the source of someone else’s.
Unit check
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