What is DeFi (decentralized finance)?
Trading, lending and borrowing run by code instead of companies. Here's how it works and why it's riskier than it looks.
DeFi, short for decentralized finance, is financial services such as trading, lending and borrowing run by smart contracts on a blockchain instead of by banks or brokers. Anyone with a crypto wallet can use them, at any hour, without an account. But there's no customer support, no deposit insurance and no undo button, and bugs, hacks and scams have cost users billions.
How DeFi works
A DeFi app is a set of smart contracts: programs on a blockchain, usually Ethereum or a network like it, that hold funds and follow fixed rules. You connect a non-custodial wallet, such as MetaMask, and approve transactions. The contract moves tokens directly between wallets. No company holds your money in between.
What people do with DeFi
| Activity | How it works | Main risk |
|---|---|---|
| Swapping on a DEX | A decentralized exchange trades tokens from a pool of funds, with no order book or company | Fake tokens, price slippage, malicious approvals |
| Providing liquidity | You deposit two tokens into a pool and earn a share of trading fees | "Impermanent loss" when prices move; contract bugs |
| Lending | You deposit tokens that others borrow, and earn interest | Hacks; bad debt in crashes |
| Borrowing | You lock up more crypto than you borrow as collateral | Automatic liquidation if your collateral falls |
| Stablecoins | Dollar tokens are the main currency of DeFi | A stablecoin losing its $1 peg |
DEX wallets
A "DEX wallet" is just a non-custodial wallet that can connect to decentralized exchanges. The most important habit: read every approval. Approving a token gives a contract permission to move it, and malicious sites use unlimited approvals to drain wallets. Revoke approvals you no longer need, and keep DeFi funds separate from long-term savings. See hot vs. cold wallets.
The risks, plainly
- Code risk: a bug can let attackers drain a contract. Audits reduce this risk but don't remove it.
- Admin keys: many "decentralized" apps can still be changed or paused by a small team.
- Rug pulls: creators launch a token or pool, attract deposits and vanish.
- Too-good yields: very high APYs are usually paid in a new token that can collapse, or come from risks you can't see.
- No safety net: no deposit insurance, chargebacks or password resets.
More in staking and yield and before you send crypto.
Frequently asked questions
What does DeFi stand for?
Decentralized finance: financial apps that run on blockchains through smart contracts, without a bank or broker in the middle.
Is DeFi safe?
It's riskier than a regulated bank or exchange. Funds can be lost to bugs, hacks, scams or your own mistaken approvals, with no one to reverse it.
What is a DEX?
A decentralized exchange: a smart contract that lets people swap tokens directly from their wallets, usually using pools of funds instead of an order book.
Where to next
Sources
Written for beginners and checked against the sources listed. Last reviewed October 26, 2026. This page is educational and is not financial, tax or legal advice. How we write and check pages.