A Basic Guide for DeFi Beginners
SUI is a scalable network built to support a large number of users with a near-infinite limit. If the network is like this, the wallet couldn't be any different, right? Today we'll learn a little more about Slush, the main wallet of the SUI network, developed by the Mysten Labs team.
- Name
- Felipe Kazuto
- @XFelipeKazutoX
A Basic Guide for DeFi Beginners
If you're new to the world of cryptocurrencies (Web3) and don't have much experience with DeFi, this guide will help you learn about and understand how the most common services in DeFi work. This will help you determine which ones will be most useful and profitable for you. Let's get started:
1 - Swap (Token Exchange)
What it is: A swap allows you to exchange one token for another directly on the blockchain.
Practical example: You have Sui but want USDC (stablecoin). Instead of going to a bank or exchange, you connect your wallet (e.g., Slush) and exchange instantly.
How it works:
The smart contract searches for liquidity (available tokens) in a pool.
Calculates the exchange price based on supply and demand.
Transactions are carried out transparently and automatically.
Advantage: Fast, without intermediaries, and accessible 24/7.
Risk: Possible slippage (difference in the exchange price).
2 - Liquidity Pool
What it is: A "collective cash register" of tokens that users deposit to provide liquidity to the market.
Practical example: You deposit SUI + USDC into a pool. This helps others make swaps.
How it works:
Liquidity providers (LPs) place two or more tokens in the pool.
In return, they receive a portion of the fees charged on each swap.
Advantage: A source of passive income for those who create LPs.
Risk: Impermanent Loss - When the value of the tokens fluctuates significantly, the LP may lose compared to simply "holding" the tokens.
3 - AMM (Automated Market Maker)
What it is: It's the mathematical mechanism that sets the price within a pool.
How it works:
The AMM uses formulas (the most famous is x*y = k) to maintain the balance between tokens.
If a lot of people buy Sui using USDC, the Sui in the pool decreases → the price of Sui automatically increases.
Advantage: It eliminates the need for an "order book" (as in traditional exchanges).
Limit: It works well, but can be inefficient in very large trades (high price impact).
4 - CLMM (Concentrated Liquidity Market Maker)
What it is: An advanced version of AMM, created by Uniswap V3.
How it works:
Instead of providing liquidity across the entire price range, you can choose a specific range (e.g., Sui between $3.60 and $3.65).
This concentrates your liquidity where there are more trades → more fees for you.
Advantage: More efficient, higher return on capital.
Risk: If the price moves out of your range, you stop earning fees until it returns.
5 - Yield Farming
What it is: A strategy for maximizing returns by moving your tokens between different protocols (pools, farms, staking) to reap rewards. It's like planting liquidity and reaping fees/interest.
How it works:
You deposit tokens into a pool or farm.
In return, you receive rewards in the form of native tokens or fees.
It often involves "stacking" strategies: providing liquidity, collecting LP tokens, and placing them in farms to multiply returns.
Advantages: Can generate high returns.
Risks: High complexity (requires strategy).
6 - Staking
What it is: Locking your tokens in a network or protocol to improve security and, in return, receive rewards.
How it works:
In Proof of Stake blockchains (e.g., Sui, Ethereum, Solana), you lock tokens to validate transactions.
In some DeFi platforms, staking simply means "locking tokens" to earn interest/rewards.
Advantages: Predictable passive income and less risk.
Risks: Liquidity lockup (some protocols require fixed periods).
7 - Lending & Borrowing
What it is:
Platforms like Suilend, Navi, and Scallop allow you to lend and borrow crypto assets without needing a bank.
How it works:
Lending: You deposit tokens (e.g., USDC), they go into a pool, and other users borrow them at interest. You receive a portion of this interest.
Borrowing: You deposit an asset as collateral (e.g., Sui) and borrow another (e.g., USDC).
Advantages:
- You can generate passive income by lending.
- You can borrow without selling your assets (good for those who believe in future appreciation).
Risks: Liquidation if the price of your collateral drops significantly, you may lose your funds.
8 - Stablecoins
What it is: Digital currencies designed to maintain a stable value, usually pegged to the dollar (1 USDC ≈ 1 USD).
How it works:
Centralized (USDT, USDC): The company maintains dollar reserves in banks.
Decentralized (DAI, FRAX): Collateralized by crypto and algorithms.
Algorithmic (UST/Luna): Rely on market mechanisms, but we've seen collapses.
Advantages: Stability amid volatility.
Risks: Collapse of the underlying asset (some stablecoins have already lost value).
9 - DCA (Dollar-Cost Averaging)
What it is: A strategy of investing a fixed amount at regular intervals, regardless of the token's price.
How it works:
Example: Buy $100 worth of Bitcoin every month.
The price fluctuates, but over time, you reduce the risk of buying everything at a high price.
Advantages: Reduces the impact of volatility.
Risks: If the market rises sharply, you lose the chance to maximize profits (compared to investing all at once).
10 - Limit Order
What it is: A buy or sell order at a specific price. You set the desired price, and the transaction only occurs if the token reaches that price.
How it works:
You place an order: "Buy Sui at $2.50."
As long as Sui is above that price, the order will not execute.
If it drops to $2.50, the purchase will occur automatically.
Advantages: Allows you to plan entries and exits without having to monitor the situation constantly.
Risks: The order may never execute if the token doesn't reach its price.
11 - Bridges
What it is: Protocols that allow you to transfer assets from one blockchain to another (e.g., moving Sui from Sui to Solana).
How it works:
You send tokens to a smart contract on the source blockchain.
The bridge "locks" these tokens and generates an equivalent version on the target blockchain (wrapped tokens).
Advantages: Interoperability (using assets in different ecosystems).
Risks: Bridges are one of the biggest targets for hacks (billions have already been stolen).
If you've made it this far, you've learned a little more about the main services you can find in DeFi. These can be useful tools in your daily life and even help you generate profits and maximize strategies. With this knowledge, you're ready to start your journey on Web3. How about starting with the most complete DeFi hub on Sui? Visit our website now and check out all the DeFi tools we offer in just a few clicks: https://my.patara.app/
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