The idea
uses smart contracts so people can swap, lend/borrow, and provide liquidity without a bank teller. Risks include bugs, , and .
Group 3 · Building on it
Decentralized finance (DeFi) basics
the open market
Why it matters
No human teller does not mean no risk — the risk is in the code and the market moves.
How it works
DeFi replaces a bank’s staff with pools and rules. In a swap pool, people deposit two assets side by side. A formula sets the price from the balance in the pool: as you take out more of one asset, it gets pricier. Lending pools work in a similar way. Borrowers lock up collateral, and if its value falls below a set line, the code sells it to repay the lenders. That forced sale is called a liquidation.
People who deposit into a pool are liquidity providers. They earn a share of trading fees, but if prices move, they can end up with less value than if they had just held their assets.
Real example: the XRP Ledger has built-in automated market makers. Each one holds a pool of two assets. A big trade shifts the balance more, so you get a worse rate, which is slippage. The pool also charges a small trading fee that goes into the pool. Source: Automated Market Makers.
AMM pool swap
Two-asset pool sets price from balances; big trades slip; fee goes into the pool.
- Two-asset pool
- Price from balance
- Slippage
- Fee into pool
Step 1In a swap pool, people deposit two assets side by side.
Read all steps
- Two-asset pool: In a swap pool, people deposit two assets side by side.
- Price from balance: A formula sets the price from the balance in the pool: as you take out more of one asset, it gets pricier.
- Slippage: A big trade shifts the balance more, so you get a worse rate, which is slippage.
- Fee into pool: The pool also charges a small trading fee that goes into the pool.
Picture it
Automated market stall with posted rules = DeFi pool. Price moving while your order fills = . Collateral sold when it thins = .
Watch out
Depositing rent money into a pool you have not tested with a tiny amount first.