Warning this is in layman’s terms partially because that’s what I am with this stuff, still a beginner myself. I would love to see the more expert and mathematically minded chime in. But I did throw myself into DeFi recently so this is what I’ve got to share so far.
Decentralized Finance is just as the name suggests, a way to enable peer to peer finance bypassing a middle man or institution. UniSwap and SushiSwap are tools for, among other things, exchanging BitCoin for Ethereum. You could send money to a friend or yourself in a way that doesn’t go through RobinHood or any other third party.
DeFi exchanges make money by lending out loans and charging an interest rate to customers, but investors can also get in on it by staking (providing liquidity) to the exchange. This is like a reverse loan where your money is being borrowed by UniSwap in the form of Crypto. Yes they’re making more than they’re letting investors in on but I do sense opportunities here as the interest rates currently offered from traditional banks are meager.
Showing my age with this analogy but if anyone remembers Chuck-e-Cheese where you would put dollars into a machine and get arcade tokens then UniSwap Tokens are like arcade tokens in this way. They’re only real value is as an investor providing liquidity to UniSwap or as a way for UniSwap to pay rewards to investors - though with success the value of a token may go up. It’s like you found $100 in arcade tokens from last year’s birthday and they have a bunch of cool new games since then. More successful altcoin projects or tokens means more volume of people exchanging between all of them.
So now you’ve got all the risk of Cryptocurrency plus you’re going out on a limb to trust the third party who you’ve now handed over the keys to. If you’re someone interested in security and cold storage this is the opposite direction for you however there are some eye popping interest rates being offered out there. I’m currently trying a modest amount on CakeDefi and have used UniSwap’s interface in the past. BlockFi is another one I’ve signed up for just to chase a referral tho.