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What Is DeFi?

Published June 2025 · Last reviewed August 2026

DeFi (Decentralized Finance) refers to financial services built on blockchains that operate without traditional intermediaries like banks or brokerages. Instead of a company running the service, smart contracts on a blockchain execute the rules automatically.

How DeFi Works

A DeFi protocol is a set of smart contracts deployed on a blockchain like Ethereum. Users interact directly with these contracts through a wallet. There is no account application, no KYC, and no middleman approving transactions — the code runs the service.

What DeFi Enables

  • Trading: Decentralized exchanges (DEXs) let users swap tokens directly from their wallets. See DEX vs CEX.
  • Lending and borrowing: Users lend assets to earn interest or borrow against collateral.
  • Liquidity provision: Users supply tokens to liquidity pools and earn trading fees.
  • Yield: Strategies like yield farming move assets between protocols to earn returns.

Why DeFi Matters

DeFi is open to anyone with an internet connection and a wallet. It operates 24/7, settles quickly, and is composable — protocols can plug into each other like building blocks. Total value deposited across DeFi, known as TVL, is a key measure of the sector's size.

The Risks

  • Smart contract risk: A bug in the contract can drain the protocol. Audits reduce but do not eliminate this.
  • Impermanent loss: Providing liquidity can lose money versus simply holding. See impermanent loss.
  • Scams and rug pulls: New protocols can be malicious. See rug pulls.
  • Self-custody responsibility: If you lose your keys, there is no support line to recover funds.

A Simple Example

You deposit USDC into a lending protocol. The contract lends it to borrowers who post collateral. You earn interest, borrowers get liquidity, and no bank is involved — only code.

Continue Learning

This article is for educational purposes only and is not financial advice.

Mike Starr

Founder, CryptoWizardTools · M.S. Organizational Management

Last reviewed: August 2026

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