Ethereum, smart contracts and DeFi
If Bitcoin is a ledger for one asset, Ethereum is a ledger that can run programs. Launched in 2015, it made it possible to build financial services without a company in the middle.
Smart contracts
A smart contract is code that lives on the blockchain and runs exactly as written when conditions are met. Anyone can interact with it, and no one can quietly change it. That allows tokens, exchanges, loans and more to run automatically. Using Ethereum costs gas, a fee paid in ether (ETH) to compensate the network for computation.
Proof of stake
In September 2022, Ethereum switched from mining to proof of stake (“the Merge”), cutting its energy use by over 99%. Validators lock up ETH as collateral to propose and verify blocks, earning rewards. Act dishonestly and part of the stake is destroyed (“slashed”).
DeFi: decentralised finance
- Decentralised exchanges (DEXs): instead of an order book, many use automated market makers. Users deposit pairs of tokens into a pool, and a formula sets the price as trades change the balance. Liquidity providers earn fees but face impermanent loss when prices move sharply.
- Lending: protocols let users deposit crypto to earn interest or borrow against it. Loans are overcollateralised, and if collateral value falls too far, the position is automatically liquidated.
- Stablecoins and derivatives: on-chain dollars (lesson 7.3) and perpetual futures (lesson 7.4) are major DeFi use cases.
Layer 2s
Ethereum can process only a limited number of transactions, which made fees expensive at busy times. Layer 2 networks process transactions off the main chain and post compressed results back to it, making them much cheaper while still relying on Ethereum's security.
The risks
Smart contract bugs and hacks have cost billions. Code is law until it is exploited. Add oracle failures (bad price feeds), governance attacks and regulatory uncertainty, and DeFi carries risks traditional finance doesn't.
Key takeaway
Ethereum turned the blockchain into a platform for programmable finance. DeFi rebuilds exchanges and lending without intermediaries, with the trade-off that you carry the technical risk yourself.
Educational content only, not financial advice. Investing involves risk and you can lose money.