DeFi in cryptocurrencies: how to earn on decentralized finance and not lose everything

Decentralized Finance attracts millions of users with promises of high returns and full control over assets. But reality is more complex — there are pitfalls to study before making your first investment.

Why are DeFi Needed? The Main Advantages of Decentralized Finance

If you hold cryptocurrency and want to derive income from it, traditional banks will not help. Here, decentralized applications (DApp) come into play, allowing you to:

• Obtain loans and credits without credit checks, using crypto assets as collateral
• Provide liquidity to pools and earn trading fees
• Exchange tokens directly, bypassing centralized exchanges
• Automatically reinvest rewards through smart contracts

The main advantage is that you have full control over your funds. There are no intermediary banks, no arbiters. Instead, everything is decided by the smart contract code. This is not only cheaper (commissions are significantly lower), but also faster — the transaction is completed in minutes instead of days.

Decentralized Finance operates on public blockchains, where data is distributed among thousands of nodes. This means that it is impossible to shut down the service or disconnect your access with a single decision. Furthermore, services are available even for those who lack access to the traditional banking system — all that is needed is the internet and a digital wallet.

Where do DeFi work? From Ethereum to alternative blockchains

Initially, almost all DeFi projects were created on Ethereum — this is where the first lending protocols and decentralized exchanges emerged. However, gas fees made it impractical for small investors to use.

Decentralized Finance has now spread to other blockchains:

• Layer 2 Solutions (Layer 2): Arbitrum and Optimism inherit the security of Ethereum but process transactions cheaper and faster.
• Alternative L1: BNB Chain, Solana, Polkadot, Avalanche — all of them support smart contracts and offer a developed DApp ecosystem.
• Emerging platforms: each new network tries to attract developers and users with advantageous conditions.

The choice of blockchain affects the speed, cost, and ecosystem of available applications.

How to Earn on DeFi? Four Main Ways

Loans and credits without intermediaries

Open lending protocols ( such as Aave or Compound) allow you to lend money to other users through a smart contract. For this, you earn interest. There are no credit checks, no paperwork — everything is transparent and cryptographically secure.

The borrower puts in more collateral than they borrow to protect the lender from a price drop. If the collateral falls below the limit, the position is automatically liquidated.

Decentralized Exchanges (DEX)

Exchanges like Uniswap and PancakeSwap operate differently from their centralized counterparts. Instead of matching orders, the two parties trade through liquidity pools — enormous reservoirs of tokens that hundreds of providers have contributed their funds to.

When you exchange one token for another, the fee is distributed among all the providers of the pool. This is a way to earn passive income: invest 1000 dollars in the pool, and you receive a share of every transaction made through this pool.

Staking and yield farming

Do you want your BNB or another token to work for you? Delegate it to validators or throw it into a staking pool and earn interest. Smart contracts can automatically reinvest rewards, increasing your overall income.

Yield farming is a more complex option where you deposit funds into several protocols at once, capturing the best APY and minimizing gas fees.

Stablecoins and traditional financial instruments

Based on DeFi, cryptocurrencies are created that are tied to real assets such as (dollars, gold, etc.). They are needed for stable value storage within the blockchain. Smart contracts can also automate mortgage and insurance functions, reducing the insurer's costs and the policy price for the client.

What could go wrong? Risks of Decentralized Finance

It's important to be honest here: high interest rates in Decentralized Finance are not a freebie. There are risks behind them that could send your portfolio into the red.

Technical Vulnerabilities

Code is not sacred. Vulnerabilities in smart contracts regularly lead to the loss of funds. Hackers can exploit bugs to drain millions from the protocol. Even well-known projects are not immune.

Moreover, your personal wallet can be hacked if you grant incorrect permissions to a dangerous DApp or connect to a phishing site.

Counterparty Risk

If you lend money through DeFi, there is a chance that the borrower will not pay it back. Yes, they put up collateral, but if the asset falls in price faster than the system can liquidate the position, the lender may incur a loss.

Unstable losses

If you provide liquidity in a pool with two tokens (for example, ETH and USDT), and their prices diverge sharply in different directions, you may lose part of your funds, even if you withdraw them later. The pool automatically adjusts the ratio of tokens, and you will receive less of the one that has skyrocketed in price.

Regulatory risk

Lawmakers around the world are just beginning to grapple with DeFi. If a project is deemed illegal or restrictions are imposed, your funds may be frozen. Many decentralized finance projects exist in a legal vacuum, and this is dangerous.

Asset Volatility

Even if the protocol itself is secure, the token price can drop by 50% in a week. If you held it as part of a strategy, the plan collapses.

How to Start Working with DeFi? Step-by-Step Guide

To use Decentralized Finance, you need to:

1. Install a compatible wallet — MetaMask (browser extension) or Trust Wallet (mobile app). Do not use custodial wallets where you do not own the private keys — they may not connect to the DApp.

2. Buy cryptocurrency — you will need funds. For example, to work with Ethereum applications, you need ETH ( for fees) and tokens of the required protocol.

3. Choose a blockchain and application — Ethereum, Arbitrum, Optimism, BNB Chain, Solana, and others offer different DApps with varying yields and risks.

4. Conduct your own research — before investing money, read the code audit, look at the project's history, and assess the risk.

5. Start small — try with a small amount first. Learning can be expensive.

DeFi vs Other Financial Systems

DeFi vs TradFi (traditional finance)

DeFi is open to anyone with internet access. But traditional banks are state-controlled and are more stable. Interestingly, they are now starting to explore DeFi protocols and looking for hybrid models.

DeFi vs CeFi ( Decentralized Finance в крипто)

Some crypto platforms are centralized - you entrust them with your tokens and believe that they will keep them safe. They offer convenience ( without needing to deal with the code ) and often insure deposits. But you lose full control over your assets.

DeFi gives full control but requires responsibility. It's neither good nor bad — it's just different approaches.

What is open banking?

Open banking is when traditional banks provide access to data through APIs so that third-party applications can integrate. This is convenient, but it is not the same as DeFi. Open banking is a modernization of the old system, while DeFi is a completely new financial system, independent of the state and banks.

In conclusion: DeFi as a tool, not a panacea

Decentralized Finance has quickly created its own ecosystem - billions of dollars are at work, and developers are creating new products every day. DeFi can truly reshape finance.

But this is not a panacea. The future of Decentralized Finance depends on technological breakthroughs ( Layer 2 solutions, faster and cheaper transactions ), clear regulation, and growing adoption. Sustainable growth requires continuous innovation and risk reduction.

The main rule: never invest more than you can afford to lose. DeFi is not a casino, but the risks here are real. Do your own research, start small, and gradually build your experience.