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of 28What is DeFi and how does it differ from traditional finance?
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DeFi (Decentralized Finance) refers to a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks. Instead, it utilizes smart contracts on blockchains, primarily Ethereum.
Key differences from traditional finance:
- Permissionless: Anyone can access DeFi protocols without KYC/AML requirements
- Transparent: All transactions are visible on the blockchain
- Composable: DeFi protocols can be combined like "money legos"
- Non-custodial: Users maintain control of their assets
- Global: Available 24/7 worldwide without geographical restrictions
- Programmable: Financial logic is encoded in smart contracts
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What are the main advantages and disadvantages of DeFi?
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Advantages:
- No intermediaries reducing costs and barriers
- Global accessibility and inclusion
- Transparency and auditability
- Composability allowing innovation
- Faster settlement times
- Programmable money and automation
Disadvantages: - Smart contract risks and bugs
- High volatility and impermanent loss
- Regulatory uncertainty
- Scalability issues and high gas fees
- User experience complexity
- Lack of consumer protection
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What is Total Value Locked (TVL) and why is it important?
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Total Value Locked (TVL) represents the total dollar value of all assets deposited in a DeFi protocol or across the entire DeFi ecosystem. It's calculated by multiplying the amount of each token locked by its current market price.
Importance:
- Protocol Health: Higher TVL indicates trust and adoption
- Liquidity Measure: More TVL usually means better liquidity and lower slippage
- Market Indicator: Growth metric for the DeFi space
- Security Proxy: Higher TVL protocols are generally more tested and secure
- Yield Calculation: Used to determine APY and returns
Example: If Uniswap has $10B TVL, it means $10B worth of assets are locked in its liquidity pools.
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How do DEXs differ from centralized exchanges (CEXs)?
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DEXs (Decentralized Exchanges):
- Non-custodial: Users control private keys
- Smart contract-based matching
- Typically higher fees due to gas costs
- Limited trading pairs
- No KYC requirements
- Resistant to censorship
CEXs (Centralized Exchanges): - Custodial: Exchange controls user funds
- Order book matching engines
- Lower trading fees
- Extensive trading pairs and features
- KYC/AML compliance required
- Subject to regulatory oversight and potential shutdowns
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What is yield farming and how does it work?
Explain the concept of "composability" in DeFi.
What is slippage and how does it affect DEX trading?
Explain the order book model vs AMM model in DEXs.
How do DeFi lending protocols work?
What is overcollateralization and why is it necessary in DeFi lending?
Explain the liquidation process in DeFi lending.
How does the Constant Product Formula work in Uniswap?
What is impermanent loss and how can it be mitigated?
What are governance tokens and how do they create value?
Explain the concept of liquidity mining incentives.
What is the role of oracles in DeFi protocols?
What are the main risks associated with DeFi protocols?
How do DeFi insurance protocols work?
Explain concentrated liquidity in Uniswap V3.
What are the key security considerations when developing DeFi smart contracts?
How do flash loans work and what are their use cases?
What is Maximum Extractable Value (MEV) and how does it affect DeFi?
Explain the concept of protocol composability and provide an example.
What are synthetic assets and how are they created in DeFi?
How do cross-chain DeFi protocols work?
What is the difference between AMM V2 and V3 models?
How do governance mechanisms work in DeFi protocols?
What are the regulatory considerations for DeFi protocols?
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DeFi Fundamentals cheatsheet
DeFi Fundamentals Technical Interview Cheat Sheet
- Summary01
- 1. Blockchain Fundamentals02
- 2. Smart Contracts03
- 3. DeFi Core Concepts04
- 4. Key DeFi Mechanisms05
- 5. Technical Architecture06
- 6. Security Considerations07
- 7. Advanced Topics08
- 8. Key Concepts & Comparisons09
- 9. Key Metrics & Formulas10
- 10. Tools & Resources11
- Quick Reference12
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