When most people talk about making money in Defi, they're usually talking about generating APY or APR % yields from crypto-assets that they have deposited.
25% interest paid out per year certainly sounds great - but where does that money come from? When the national savings account interest is 0.06%, how can these crypto dapps afford to pay 20%.
Let's take a high-level overview of where yields in Defi come from.
This is a pretty straightforward concept...you lend your assets to a platform by "locking" them in a smart contract. Depending on the protocol, you might be able to withdraw those funds whenever, or they may be locked for a set period of time. Borrows can access those assets as loans and then they pay them back with interest. The smart contracts distribute the interest accrued to lenders in proportion to what they lock in.
What happens if borrowers default? Every Dapp is different and you should do your own research before engaging with anything. Most money markets in Defi operate off of fully- and over-collateral loans. This means that borrowers have to deposit as much or more than what they borrow. This isn't the place to go into the details of liquidation and collateral-ratios but just know that the good lending defi applications have sufficient protections in place for lenders.
Staking is a term you'll hear a lot in crypto...it usually refers to blockchains that operate on a "proof-of-stake" network. In Defi, staking is simply a way to encourage users to lock their asset up for the long term, instead of immediately selling them. Most protocols will usually share network revenues with stakers to keep them incentivized.
DEXs (decentralized exchanges) such as Uniswap, Pancakeswap, and Sushiswap are popular because of their AMM protocols (automated market makers). Instead of maintaining order books like traditional financial exchanges (or even centralized crypto exchanges) these DEXs have "pools" of token pairs ($1m of ETH and $1m of USDC).
These pools are public and anyone can provide liquidity to them. In exchange for depositing your tokens, you receive a LP token that represents your deposit. (You can redeem your LP tokens at any time and receive an equal number of the 2 tokens back).
As an LP, you earn a share of the swap fees or commission proportional to your share in the pool.
When providing liquidity it's important to be aware of impermanent loss that might occur is the tokens you pool fluctuate a lot in value. Impermanent loss is a bit more advanced than this guide is meant to cover but you should definitely learn about it before entering an LP position.
Yield farming allows you to earn additional income of top of the liquidity that you're providing. When you receive an LP token, you can lock these tokens up in "farms" that allow you to receive even more tokens (or platform tokens). Think of Yield farming as a combination of both LP-ing and staking.