What is DeFi and how does it work
DeFi is a broad term for applications that offer trading, lending and borrowing through smart contracts on a blockchain. Users usually transact directly from a wallet, but code, liquidity and price risks remain.
In brief
DeFi, short for decentralized finance, is a broad term for applications that offer trading, lending, borrowing and yield-related services.
Instead of opening a bank account, you connect a crypto wallet and interact with a . This can reduce the role of intermediaries, but it does not remove risk.
How DeFi works
Smart contracts sit at the center of DeFi applications. They can receive assets, execute swaps, check collateral and make payments under rules written into code.
On a decentralized exchange, for example, users supply tokens to a pool. Someone who wants to swap trades against that pool. The protocol's rules determine the price and fee.
What can you do with DeFi
- Swap tokens on decentralized exchanges
- Borrow against collateral
- Lend assets to earn interest
- Use stablecoins
- Access derivatives, prediction markets and insurance-like products
Not every application is decentralized to the same degree. Interfaces, admin keys, price feeds or upgrade permissions may still be controlled by a team.
What do you need to use DeFi
You usually need a compatible crypto wallet, the network asset used for transaction fees and the token involved in the activity. Check the domain and selected network before connecting.
When a transaction requests , read which token it covers and how much spending permission it grants. Unlimited approval is convenient, but it can increase losses if the contract is compromised.
Main risks
Biggest uncertainty Open code and onchain records do not remove risk; smart contract, price, liquidity and user risks remain.
Smart contract risk: A bug or poor design can lead to lost funds.
Liquidity risk: Trading or closing a position may cost more than expected.
Price and liquidation risk: A borrowing position can be closed automatically when collateral falls.
Interface and signature risk: A fake site or unsafe approval can expose assets in a wallet.
DeFi may be open and available at any time. That does not mean its transactions can be reversed. This guide did not assess the security or returns of any specific protocol.
Sources
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- #1
Source for the definition of DeFi, the role of smart contracts and the main categories of use.
ethereum.org· our own copy· no screenshot· cited 1 times in the text
Evidence chain: 1 sources
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Sources (1)
- #1
Source for the definition of DeFi, the role of smart contracts and the main categories of use.
ethereum.org/defi/our own copyopen in a new tab - no screenshot captured
- captured on Sep 9, 2026, 7:09 PM
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