Decentralized finance is built from small building blocks that connect together to create rich products. Each block has a clear purpose, but the real power appears when they are composed across chains and apps. In this guide, we map the Top 10 DeFi Primitives and How They Interact so readers can see how funds flow, risk is priced, and incentives are aligned. We avoid jargon when possible, yet we cover details that matter for engineers, founders, and investors. By the end, you will understand how these primitives plug into one another to move liquidity, generate yield, hedge exposure, and coordinate decisions in open markets.
#1 Liquidity pools and AMMs
Automated market makers run liquidity pools where two or more tokens are priced by a curve. Traders swap against the pool, while liquidity providers earn fees. Pool design shapes slippage, impermanent loss, and capital efficiency. LP tokens represent a proportional claim on reserves, which can be staked in farms or pledged as lending collateral. Routers split orders across pools to find better execution, and oracles read time weighted prices to feed other apps. When volatility rises, dynamic fees or concentrated ranges can protect providers and sustain depth for aggregators and derivatives venues that rely on cheap and continuous liquidity.
#2 Decentralized exchanges and order routing
Decentralized exchanges expose pools, limit orders, or on chain order books where users trade custody free. Aggregators sit above many exchanges and route orders across them to minimize price impact and fees. They use smart order routing, gas aware paths, and private relays to reduce extractable value. Routers also settle cross asset swaps using bridges and messaging layers. The output price becomes a data point for oracles, while swaps mint or burn LP tokens that can move directly into vaults for auto compounding. Liquidity programs and fee rebates connect DEXs with lending and derivative venues to attract volume.
#3 Lending markets and collateral reuse
Lending markets pool deposits and allow overcollateralized borrowing. Depositors earn variable yields sourced from borrower interest and incentive programs. Collateral factors and liquidation thresholds are set by governance with input from risk frameworks and oracle feeds. When users deposit LP tokens, staked assets, or yield tokens as collateral, leverage loops appear and amplify returns and risk. Liquidators monitor health factors and repay debt in exchange for a bonus, often funded by flash loans that minimize capital needs. Composability ties lending to DEXs, oracles, and derivatives, letting traders short assets, hedge rates, or mint stablecoins efficiently.
#4 CDPs and stablecoin issuance
Collateralized debt positions lock volatile assets and mint a stablecoin against them. A stability fee accrues to the debt, and liquidation auctions or automated swaps restore collateralization when prices fall. Peg stability relies on arbitrage across DEX pools, lending markets, and market makers that balance the supply and demand for the stable asset. Governance tunes parameters such as debt ceilings, collateral types, and fees after consulting risk models and oracle data. CDP systems often integrate with savings modules, where users park stablecoins to earn protocol yield, and with payment rails and bridges that carry the currency across chains.
#5 Oracles and reference pricing
Oracles deliver external market data to smart contracts so they can price collateral, trigger liquidations, and settle derivatives. Robust designs aggregate many exchanges over time windows and include circuit breakers, heartbeats, and deviation checks. Protocols read oracles to compute health factors, set minting limits, and define margin requirements. If an oracle stalls or drifts, governance and guardians may pause sensitive actions. Some exchanges also publish on chain signed prices that backstop AMM values. Cross chain systems forward oracle updates so that lending, stablecoins, and perps maintain consistent risk views across networks. This shared reference rate lets many primitives interoperate safely.
#6 Yield aggregators and vaults
Yield aggregators collect user deposits and deploy them across strategies that farm rewards, rebalance pools, and compound fees. Strategies plug into DEXs, lending markets, stablecoin modules, and staking to chase the best risk adjusted returns. Vault tokens represent a share of the underlying assets and can often be used as collateral elsewhere, which stacks yields through safe leverage. Risk controls cap exposure to protocols and chains, while automation harvests rewards and sells them back into the base asset. Aggregators rely on oracles for fair value accounting and on bridges to unify fragmented opportunities across networks.
#7 Derivatives and perpetual venues
On chain derivatives offer futures, perpetuals, and options that let traders hedge or gain leveraged exposure. Funding rates keep perp prices near the spot index, which is calculated from oracles that reflect many exchanges. Margin engines accept collateral such as stablecoins, LP tokens, and liquid staking receipts, then risk modules set haircuts by asset volatility and liquidity. Exchanges route orders through DEX pools or matching engines and may use insurance funds to absorb losses from bankrupt accounts. Perp venues interact with lending markets for borrow rates, with AMMs for hedging inventory, and with aggregators that split orders across liquidity sources.
#8 Liquid staking and restaking
Staking converts base tokens into receipts that earn protocol rewards while remaining liquid for DeFi use. These receipts can be supplied to lending markets, paired in AMMs, or pledged in derivatives as margin. Restaking extends the idea by letting receipts help secure additional networks or services and earn extra rewards, which changes the risk profile. When used as collateral, risk managers monitor correlations between validator performance, slashing events, and market prices. Staked receipts also flow into yield vaults that auto compound. Healthy integrations depend on oracles that track exchange rates between receipts and the underlying so accounting stays correct.
#9 Flash loans and atomic execution
Flash loans let anyone borrow large amounts within one transaction provided the funds are returned before the block ends. This enables capital free arbitrage, collateral swaps, and liquidations that keep markets efficient. Complex paths bundle DEX swaps, lending repays, and CDP adjustments into atomic sequences that either fully execute or fully revert. Used well, flash loans reduce risk by speeding deleveraging during stress and by closing price gaps across pools. Used poorly, they can amplify oracle manipulation or drain insecure pools, which is why protocols adopt guarded launches, audits, and rate limits and watch on chain monitors closely.
#10 Bridges and interoperability layers
Bridges and interoperability layers move assets and messages across chains so applications can access wider liquidity and data. They secure transfers with light clients, validators, or liquidity networks, each with specific trust and latency tradeoffs. Messaging lets lending markets and vaults sync positions and oracle updates so risk parameters stay aligned across deployments. Bridged assets can seed AMMs, serve as collateral, or settle derivatives, but they add extra security assumptions that risk managers must price. Aggregators and routers integrate bridges to build seamless cross chain swaps that combine many steps into one user flow and reduce complexity.