Glossary
DeFi (decentralized finance)
DeFi (decentralized finance) is the set of financial services, such as trading, lending, borrowing and earning yield, that run on public blockchains through smart contracts, without a bank or broker holding your funds. Users interact directly from their own wallet.
Also called Decentralized finance, Decentralised finance, Open finance, On-chain finance
See also
DeFi, short for decentralized finance, refers to financial applications that run on public blockchains instead of through banks, brokers or exchanges. The rules of each service are written in smart contracts, programs that execute automatically. Anyone with a crypto wallet can use them, at any hour, without opening an account or asking for permission.
How DeFi works
You connect a self-custody wallet to an application and sign transactions. The smart contract holds the deposited assets and applies its rules. The main building blocks are:
- Decentralized exchanges (DEXs): swap tokens against a liquidity pool instead of an order book run by a company.
- Lending markets: deposit crypto to earn interest, or borrow by locking collateral worth more than the loan.
- Stablecoins: dollar- or euro-pegged tokens that serve as the unit of account.
- Staking and yield products: earn rewards for securing a network or providing liquidity.
These blocks can be combined, which is why DeFi is often called “money legos”. The size of the sector is usually measured by total value locked.
A concrete example
You hold 1 ETH, worth $3,000 in this example, and need $1,000 in stablecoins without selling your ether. You deposit the ETH in a lending protocol, which lets you borrow up to a set share of its value, say 75%. You borrow $1,000 of USDC and pay a variable interest rate. If the protocol’s liquidation threshold is 80% and ETH falls below $1,250 (80% of $1,250 = $1,000), your collateral no longer covers the loan with enough margin and the protocol automatically sells part of your ETH to repay the debt: this is liquidation.
Why DeFi matters
DeFi offers open access, transparent rules that anyone can inspect, and settlement in minutes. It lets users keep control of their assets and has created new markets that did not exist in traditional finance. Our guide DeFi explained covers the main uses step by step.
Risks and limits
- Smart contract bugs and hacks: code errors have led to large losses, even in audited protocols.
- Liquidation: leveraged positions can be closed automatically in a price drop.
- Oracle and bridge failures: wrong price data or a hacked bridge can drain funds.
- No safety net: there is no deposit guarantee, and a mistaken transaction cannot be reversed.
- Scams and regulation: fake apps, phishing approvals and changing rules add further risk.