A Beginner’s Guide to DeFi

Disclaimer: This article is for informational and educational purposes only and does not constitute financial, investment, or legal advice. Cryptocurrency and DeFi protocols carry significant risks, including the potential loss of capital. Always conduct your own research and consult a qualified financial advisor before making investment decisions. The author is not responsible for any losses or decisions made based on the information provided.

TL; DR: DeFi money markets offers better yields than traditional money markets, but not without their risks. This article explains a simple DeFi strategy using stablecoins to earn a 6%+ APY.

DeFi Explained

Decentralized Finance (DeFi) relies on smart contracts (computer programs) that operate on the blockchain allowing people to earn interest on their cryptocurrency in several ways. This includes lending cryptocurrencies to others, borrowing cryptocurrencies, providing liquidity to liquidity pools, and staking assets (including LSTs, LRTs, and bitcoin staking). This article will focus on the lending and borrowing aspect of DeFi. Borrowing and lending protocols are similar to how banks operate except they are limited to issuing overcollateralized loans to prevent people from running away with other people’s funds. There are protocols that allow undercollateralized loans to be issued but these protocols often come with significant increase risk of hacks compared to existing heavily used DeFi protocols.

Bullish and Bearish Perspectives on DeFi

Bullish View

A bullish perspective on DeFi is that there are codebases that have been used to lend and borrow billions of dollars of cryptocurrency for several years despite being open for anybody to use and manipulate as they see fit. This therefore paves the way for free-to use and permissionless protocols to be the potential future of how finance is done. Efficiency is improved significantly compared to banks as DeFi protocols operate exclusively as code. The current amount of funds deposited into DeFi is growing and I would argue a general trust in the code of protocols is also growing as time passes without hacks.

Bearish View

The contrary perspective to this is that if a codebase has not been hacked it does not guarantee it won’t be hacked in the future. One could even go as far as to say that hacks in DeFi, especially among smaller protocols, is somewhat commonplace. Additionally, DeFi is limited to issuing undercollateralized loans thereby not being able to replace a core function of a bank.

General DeFi Strategies

Below I break down some basic ways of generating yield in DeFi followed by a simple strategy that uses stablecoins and money markets that can generate a 6%+ yield.

Staking

Staking is the act of providing funds that is used as collateral in the process of verifying the validity of transactions on a blockchain. Staking can be done directly through exchanges like Coinbase, fintech applications like Robinhood or, by using a staking as a service platform like Lido Finance.  

 Top 10 largest staking as a services platform on June 23rd 2025.

Liquid Staking

Users provide their tokens in exchange for a liquid token that appreciates in price and can be used in DeFi. An example of this is using Lido Finance’s stETH. Users deposit ETH to the protocol and receive stETH in return. stETH is not directly pegged to ETH and holds more risk than staking protocols that solely stake users' assets. Risks include relying on the smart contracts of Lido Finance and the price being at a discount, where stETH is below the price of ETH due to large sell-offs. Staking (explained below), although being adopted largely by traditional investors, I would argue is not a good choice of tool to earn yield – I will explain why in a different article.

Liquid Restaking

Liquid Restaking is the practice of using a staked asset to secure other networks that require tokens to be used as collateral. In this case, the token is being used not only to secure Ethereum but also other networks that rely on EigenLayer for security. Platforms like Ether.fi provide users with a restaking token. Think of it like a derivative of a derivative.

Bitcoin Staking

Using platforms like Babylon, where BTC is locked on the Bitcoin network and used as collateral for staking on PoS chains. It's a good option for people who want to hold Bitcoin and earn yield, but it's still a new technology and therefore has high risks.

Liquidity For Liquidity Pools

Liquidity pools are pools that allow cryptocurrency pairs to be traded by dictating the price of an asset based on their respective amounts of liquidity. Users can deposit one or both of the token pairs to earn yield from trading fees.

Liquidity For Lending Protocols

Lending protocols allow users to borrow stable assets by providing ETH or another volatile asset as collateral. Liquidity providers can supply the stablecoin to the protocol’s liquidity pool, where it can be borrowed by others. In return, they earn fees from the loans.

Liquidity For Lending and Borrowing Protocols

Similar to standard lending protocols, but in this case, assets are lent directly to borrowers rather than being pooled. This model is often used in peer-to-peer lending protocols, where lenders can set terms and counterparties are matched more explicitly.

Strategy: Stablecoins on Money Markets

This is one of the strategies I implement in DeFi broken down step by step.

Step 1: Choose Your DeFi Protocol

First begin by deciding which DeFi protocols you are comfortable using. There are a few indicators I use such as the TVL locked in that protocol, the name brand reputation of the protocol and how long the project has been around for. Aave, Morpho, Venus, and Euler I consider trustable protocols.

Note: Don’t forget to check out the decentralized autonomous organization (DAOs) where you can see how changes are decided and implemented by the team of the project you are using

Step 2: Choose Your Blockchain Network

DeFi applications typically are available to be used on different networks other than Ethereum. Ethereum is unarguably the safest way to store funds, although comes with likely too high gas fees for beginners. Choosing which network to use is not an arbitrary task and is something I am interested in learning more about. A good rule of thumb is that the higher the yield you can get on a network the more risk there is, whether that’s security related or for some other reason. Different networks offer different yields so choosing a network which has been used for several years like Arbitrum or Optimism is a good choice.

Step 3: Choose Your Stablecoin

Choosing which stablecoin to provide means holding the stablecoin in the case of a de-peg event. USDC is considered the safest stablecoin to hold, while others hold more risks. The return on money markets in DeFi for stablecoins can vary, but a good selection can generate a yield of anywhere from 5-10% depending on your risk tolerance. Conservative investors can still earn a yield of 6%+ which is better than traditional money markets but of course comes with more risk.

Step 4: Find the Best Yield for Your Protocol and Stablecoin

Using a tool like De.Fi shows the average 7-day and 30-day yield of different protocols and their networks for different assets like USDC. DeBank is another great tool which is used to monitor your position as it tells you how much profit you have gained by simply cross referencing your deposited funds and subtracted it by your wallet grains. Making a single deposit instead of several makes tracking funds easier and makes measuring gains simpler. Debank also provides your transaction history in an easy-to-understand format so you can see your previous activity.

Step 5: Deposit funds and Watch Your Yield Grow.

I recommend going to the website directly to deposit your funds. Make sure you go to the correct website. You can also use tools like DeFi Saver to manage your position more easily if you are selecting many protocols.  

Concluding Thoughts

Personally, I only invest the amount of money into DeFi which I am comfortable having complete loss of funds over, and I recommend that same for all users of DeFi. The reality is that hacks occur in the tens of millions of dollars, and DeFi really is the wild west of finance. My recommendation is to begin your journey by scrolling through Peckshield’s Twitter page to see how they explain and keep track of hacks today and from several years ago to better understand the different types of exploits in DeFi.