DeFi (decentralised finance)

Decentralised finance, or DeFi, refers to financial services rebuilt as smart contracts on public blockchains rather than run by banks, brokers, or exchanges. Lending, borrowing, trading, and yield products operate through code that anyone can inspect and interact with directly from a self-custody wallet. Transactions settle on-chain and are typically visible to all, without a central operator holding funds.

Why it matters

DeFi lowers barriers to entry and offers transparency into how a protocol behaves, since the logic is public. But removing intermediaries also removes their safeguards. There is often no customer support, no chargebacks, and no regulator standing behind a failed product. Smart-contract bugs, governance attacks, and economic exploits have caused large losses, and users bear responsibility for verifying what they sign. Auditing a protocol reduces but never eliminates this risk, so understanding how a product actually generates its returns, and what could cause them to disappear, is a basic form of due diligence.

Common misunderstanding

DeFi is often assumed to be inherently safe because it is trustless and code-based. Trustless means you rely on code rather than a company, but that code can contain flaws, and the surrounding front end or token can still be malicious. Decentralisation reduces some risks while introducing new technical and operational ones. High advertised yields, in particular, usually reflect real risk somewhere in the system rather than a free lunch, and treating them as safe is a common and costly error.

Related terms

See automated market maker, liquidity pool, dApp and stablecoin.