DeFi (decentralised finance)

DeFi, short for decentralised finance, uses smart contracts, programs stored on a public blockchain that execute automatically when conditions are met, to offer services traditionally provided by financial institutions. Examples include decentralised exchanges, where trades are made against pools of tokens supplied by users rather than through an order book; lending protocols, where users deposit crypto to earn interest or borrow against collateral; and yield products that combine these. Users typically connect a self-custody crypto wallet, keep control of their own keys and often need no account or identity checks, though some services and jurisdictions now require them.

DeFi removes intermediaries, but it also removes their protections. There is usually no regulator to complain to, no investor compensation scheme and no way to reverse a mistaken transaction. Risks include bugs or exploits in smart contract code, which have led to large thefts; automatic liquidation of loans when collateral prices fall, which can wipe out a borrower’s stake; stablecoins losing their peg; and outright fraud, where developers abandon a project and take users’ funds. High advertised yields often reflect these risks or are paid in volatile tokens. DeFi is high risk, and money put into it can be lost entirely.