Crypto glossary

DeFi (Decentralized Finance)

DeFi, short for decentralized finance, means financial services such as trading, lending, borrowing and derivatives that run as smart contracts on a blockchain. Anyone with a wallet can use them, without a bank, broker or account approval.

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How DeFi works

In traditional finance, a bank holds your money, keeps the records and decides who may borrow. In DeFi, those roles are taken by smart contracts: programs on a blockchain, most often Ethereum or a network built like it, that hold deposits and follow fixed rules. You connect a self-custody wallet, approve a transaction, and the contract executes it. Nobody can quietly change your balance, and every transaction is publicly visible.

Because these contracts can call each other, DeFi apps stack like building blocks: a token earned in one protocol can be used as collateral in a second and traded in a third.

What people use it for

Decentralized exchanges (DEXs) such as Uniswap let you swap tokens against liquidity pools instead of an order book run by a company. Lending protocols such as Aave let you deposit assets to earn interest or borrow against collateral. Stablecoins like DAI are issued by smart contracts against locked collateral. Other protocols offer derivatives, liquid staking and on-chain savings products.

Why it matters

DeFi is open around the clock to anyone with an internet connection, settles in minutes, and keeps you in control of your keys. Its rules are visible in code, so in principle anyone can check how a protocol works. That transparency and openness is what separates it from centralized crypto platforms, where you have to trust a company's books.

Risks

Code is the main risk: bugs and exploits have drained hundreds of protocols, and transactions cannot be reversed. Many protocols still have admin keys or upgradeable contracts, so decentralized does not always mean nobody is in control. Oracle failures, liquidations, impermanent loss and depegging stablecoins are further risks.

There is usually no customer support, deposit insurance or chargeback, and phishing sites that copy real apps are common. High advertised yields often come from new token rewards rather than real income, and can vanish quickly.

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Frequently asked questions

Is DeFi safe?

It carries real risk. Even audited protocols have been exploited, and mistakes like signing a malicious approval cannot be undone. Many users limit how much they put into any single protocol.

Do I need an account to use DeFi?

No. You connect a self-custody wallet and pay network fees; no sign-up or identity check is needed by the protocol itself, although some websites block certain regions.

What is the difference between DeFi and CeFi?

In CeFi, a company holds your funds and runs the service. In DeFi, smart contracts do, and you keep control of your own keys.

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All glossary terms · Educational reference only — not investment, legal, tax or financial advice.