
Mega DeFi Edition Part One 📕
DEFI
Mega DeFi Edition Part One 📕

Over the next few days, the Litepaper format is going to be a little different. I’ve received a lot of requests from readers to do another long-form piece of content over DeFi (Decentralized Finance). Why? 🤔
Because DeFi is huge, and it’s getting bigger. And DeFi can be confusing as hell.
In today’s Litepaper, we’re going to break down why DeFi is a thing, some of the jargon and lingo, some of the early innovators in the space, and a walkthrough of yield farming – the passive income aspects of DeFi. 🧠
DEFI
Why DeFi Matters 🧠
At its core, DeFi is about breaking down barriers—geographical, bureaucratic, or otherwise—so that anyone with an internet connection can access a full range of financial services. 🏦
No more depending on big banks or centralized institutions to dictate who gets a loan, what fees you have to pay, or which currencies you’re allowed to use.
But DeFi isn’t just making finance more inclusive; it’s making it more transparent and adaptable. Instead of trusting opaque organizations with your money, you’re leaning on open-source smart contracts (basically, software code) that anyone can audit and verify.
And because the whole system runs on decentralized blockchain networks, there’s no single point of failure or censorship. Combine that with rapidly evolving technology that are slashing fees and speeding up transactions—and you have a recipe for explosive growth.
WTF DOES THAT MEAN
DeFi Jargon, Lingo, and More Jargon 😕
If there’s one thing that keeps people out of DeFi, it’s the jargon and lingo of the space. Abbreviations and terms like TVL, yield farm, LP, impermanent loss, etc, hell, it kept me away from the space for a while. 👋
Let’s tackle some of this lingo:
-
DeFi: Decentralized Finance – financial systems built on blockchain without intermediaries.
-
TVL: Total Value Locked – the total amount of funds deposited in a DeFi protocol.
-
AMM: Automated Market Maker – a DEX model that uses liquidity pools instead of order books.
-
Liquidity Pool: A pool of funds locked in a smart contract, used for trading or lending.
-
DAO: Decentralized Autonomous Organization – an internet-based group governed by token holders.
-
Stablecoin: A cryptocurrency pegged to a stable asset, like USD (e.g., DAI, USDT).
-
LP Token: Liquidity Provider Token – a token you get when you provide liquidity, representing your share of the pool.
-
Yield Farming: Earning rewards by moving your crypto between DeFi platforms offering high returns.
-
APY: Annual Percentage Yield – the yearly return on your investment, considering compounding interest.
-
Staking: Locking up tokens to secure a network or earn rewards.
-
DEX: Decentralized Exchange – platforms for peer-to-peer trading without intermediaries (e.g., Uniswap).
-
Impermanent Loss: A temporary loss faced by liquidity providers when the value of assets in the pool fluctuates.
-
Flash Loan: An uncollateralized loan that must be borrowed and repaid within one transaction.
-
Governance Token: A token that grants holders voting rights in a protocol’s decisions.
-
Farm Token: Rewards distributed to yield farmers for participating in liquidity pools.
-
Rug Pull: A scam where developers drain liquidity and disappear.
-
Smart Contract Risk: The possibility of bugs or vulnerabilities in a protocol’s code.
-
Liquidation: When a borrower’s collateral is sold off because its value dropped below the required threshold.
-
Gas Fees: Transaction fees on a blockchain (especially Ethereum).
-
dApp: Decentralized Application – an app that runs on a blockchain.
-
Whale: A person or entity holding a large amount of cryptocurrency.
DeFi jargon, like the space itself, evolves fast, so it’s likely we’ll have to add more here in the future. 📆
SPONSORED
Maximize Your Crypto Tax Refund with ZenLedger
Tax season is here, and if you’re trading or investing in crypto, ZenLedger is your ultimate solution. Simplify your crypto taxes with easy integration to every exchange and wallet, detailed transaction tracking, and accurate tax reporting. Whether you’re a beginner or a seasoned pro, ZenLedger helps you minimize liabilities and uncover potential deductions—all while staying IRS-compliant.
Don’t let the complexities of crypto taxes slow you down. Start using ZenLedger today and focus on what matters: growing your portfolio.
*3rd Party Ad. Not an offer or recommendation by Stocktwits. See disclosure here.
DEFI
Early Innovators and Milestones
MakerDAO (2017)

MakerDAO was among the first protocols to really shake things up in DeFi. It introduced DAI, an over-collateralized stablecoin pegged to the US dollar by locking up crypto (initially ETH) as collateral. 🪙
Plus, MakerDAO’s open governance model got everyone excited about how decentralized decision-making could shape the future.
A DAO, or Decentralized Autonomous Organization, is a fancy way of saying “a group of people working together on the internet, run by code instead of bosses.” Think of it like a digital co-op: members pool resources (usually crypto) and make decisions collectively, often by voting with tokens.
Here’s the gist:
-
No Central Authority: DAOs don’t have CEOs or boardrooms. Rules are written into smart contracts, so the organization runs itself (as long as the code works, anyway).
-
Token-Based Voting: Members typically use governance tokens to vote on proposals—like funding a project, changing the rules, or deciding what meme goes on the homepage.
-
Transparent and Trustless: Everything happens on the blockchain, so decisions and transactions are public, and you don’t need to “trust” anyone; you can just check the ledger.
DAOs can be used for everything from managing a DeFi protocol to buying rare NFTs, funding public goods, or even running virtual clubs. Basically, it’s teamwork without the middleman. 👨🦲
Uniswap (2018)

The first ‘major’ DEX (Decentralized Exchange) the crypto world got was Uniswap – founded by Hayden Adams. It wasn’t the first DEX, (that was NXT in 2014), but Uniswap flipped the usual trading model on its head. 🦄
Instead of an old-fashioned order book, Uniswap uses Automated Market Makers (AMMs). Basically, anyone could throw their tokens into a “pool” and earn a share of the trading fees. You get to be the market maker.
Side note: we’ll tackle DEXs and AMMs in tomorrow’s Litepaper.
No centralized exchange, no gatekeepers—just an easy, permissionless way to swap tokens right from your own wallet. This breakthrough unlocked a whole new wave of decentralized exchanges, making token swaps more accessible than ever.
And Uniswap has become so successful its competes with, and sometimes outperforms, major centralized exchanges like Coinbase. 😱
Compound and Aave (2019–2020)

Compound (led by Robert Leshner) and Aave (founded by Stani Kulechov) took expanded DeFi into a whole new realm of use with lending, borrowing, and yield farming. 🧺
Have something you plan to just HODL? You can lend them out and earn interest. Need some liquidity? Borrow by locking up collateral, with zero need for credit checks or physical bank branches.
This was a big leap toward a more transparent, self-sustaining financial system that rewards active participation.
Cool Fact: Aave is basically the Bitcoin of the lending space with almost $35 billion in TVL (total value locked). ✅
ALL ABOUT THAT YIELD
DeFi Is Perfect For Passive Income Seekers 💵
If there’s one thing that DeFi is most known for and most used for, it’s for income generation via yield farming. 🧑🌾
Yield farming is DeFi’s version of earning interest or dividends, but it’s turbocharged on steroids, speed, and —and riskier. Here’s the breakdown:
What It Is 🤷
Yield farming is the process of earning rewards (often in the form of tokens) by providing liquidity to DeFi protocols. Think of it as getting paid for “working” your crypto instead of letting it sit idle.
How It Works 🫵
-
Provide Liquidity:
-
You deposit crypto into a liquidity pool—a smart contract holding funds that users can trade, borrow, or lend against.
-
Example: On Uniswap, you can add ETH and USDC to a pool to facilitate trading between these two tokens.
-
-
Earn LP Tokens:
-
In return, you get Liquidity Provider (LP) tokens, which represents your share of the pool.
-
-
Farm Rewards:
-
Stake those LP tokens into a protocol that offers yield farming incentives (like COMP on Compound or CAKE on PancakeSwap).
-
You’ll earn rewards, typically in the platform’s governance token, while still earning a cut of the trading fees from the liquidity pool.
-
Here’s a step by step below ⤵️
ALL ABOUT THAT YIELD
Yield Farming In An ETH/USD Pool, An Example 🎯
Let’s say you want to take advantage of that sweet, sweet, passive income in DeFi via yield farming. One of the most common ways is providing liquidity on a DEX. For this example, we’re using Uniswap. 🤑
Think of it as being a mini-market maker – because that’s literally what you are doing with others: making a market.
Step-by-Step Example 👣
-
Provide Liquidity to the ETH/USDC pool:
-
You need to deposit an equal value of ETH and USDC into the pool. For example, if ETH is $2,000 (ya, it’s higher, I know, but bear with me), you might provide 1 ETH ($2,000) and $2,000 worth of USDC. The total deposit is $4,000.
-
In return, Uniswap gives you Liquidity Provider (LP) tokens, representing your share of the pool. If the pool has $1 million in total value, your $4,000 deposit means you own 0.4% of the pool. 🟰
-
-
How You Earn:
-
Trading Fees: Every time someone swaps ETH for USDC or vice versa, they pay a 0.3% fee. These fees are distributed proportionally to LPs based on their share of the pool.
-
For example, if the daily trading volume in the pool is $500,000, and you own 0.4% of the pool, you’d earn 0.4% of the fees:
$500,000×0.003×0.004 = $6 USD/day
-
-
Incentives (Optional): Some platforms offer additional rewards (e.g., governance tokens like UNI) to incentivize liquidity provision.
-
-
Impermanent Loss:
-
If the price of ETH changes significantly, the value of your deposited assets might deviate from simply holding ETH and USDC separately. For example, if ETH increases to $3,000, you’ll end up with less ETH and more USDC because the pool automatically rebalances to facilitate trading.
-
If ETH/USDC returns to its original ratio, the impermanent loss disappears. However, fees and rewards can offset this.
-
-
Withdraw:
-
At any time (usually), you can withdraw your liquidity. You’ll receive your share of the pool, which now includes your initial deposit (adjusted for price changes) plus fees earned.
-
Not All AMM’s Are The Same 🧠
Liquidity pools on DEX’s work because the pools are automatically balanced with an Automated Market Maker algorithm.
However, not all AMMs are the same. Tomorrow’s Litepaper will tackle the different types of AMM out there and why one may be better than another, depending on the pool(s) you want to farm. 🌽
Get In Touch 📬
Follow our social channels for great, real-time content on Stocktwits and Twitter. And check out our YouTube channel for in-depth video content! 📲
Email me (Jonathan Morgan) your feedback; I’d love to hear from you. 📧
Want to sponsor this newsletter and reach hundreds of thousands of crypto enthusiasts? Reach us here. 👍
Terms & Conditions 📝
Securities Disclaimer: STOCKTWITS IS NOT A TAX ADVISOR, BROKER, FINANCIAL ADVISOR OR INVESTMENT ADVISOR. THE SERVICE IS NOT INTENDED TO PROVIDE TAX, LEGAL, FINANCIAL OR INVESTMENT ADVICE, AND NOTHING ON THE SERVICE SHOULD BE CONSTRUED AS AN OFFER TO SELL, A SOLICITATION OF AN OFFER TO BUY, OR A RECOMMENDATION FOR ANY SECURITY. Trading in such securities can result in immediate and substantial losses of the capital invested. You should only invest risk capital, and not capital required for other purposes. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should also consult an attorney or tax professional regarding your specific legal or tax situation. The Content is to be used for informational and entertainment purposes only and the Service does not provide investment advice for any individual. Stocktwits, its affiliates and partners specifically disclaim any and all liability or loss arising out of any action taken in reliance on Content, including but not limited to market value or other loss on the sale or purchase of any company, property, product, service, security, instrument, or any other matter. You understand that an investment in any security is subject to a number of risks, and that discussions of any security published on the Service will not contain a list or description of relevant risk factors. In addition, please note that some of the stocks about which Content is published on the Service have a low market capitalization and/or insufficient public float. Such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information. Read the full terms & conditions here. 🔍
Author Disclosure: The author of this newsletter holds positions in ADA, LTC, IMX, WMT, COPI, MIN, AGIX, ALGO, DOGE, ZEC, AVAX, XLM, XTZ, and NEAR. 📋
