What is DeFi?
Decentralized finance, usually shortened to DeFi, is a way of offering financial services on a public blockchain. Instead of opening an account at a bank or broker, a person connects a crypto wallet to an app and uses services such as swapping tokens, borrowing against collateral or lending to earn interest. The rules are written in code, and the code is public.
The term mostly refers to applications built on programmable blockchains, with Ethereum being the best known. Similar apps also exist on other networks. Together they form an open ecosystem of apps that can be combined, which is why people sometimes call them "money legos".
DeFi is still young, experimental and risky. It is useful to understand, but understanding it is different from being advised to use it. Nothing on this page is investment, tax or legal advice.
DeFi replaces a company that holds your money and makes decisions with software that follows published rules. That can remove some middlemen, but it also moves responsibility and risk onto the user.
How DeFi works
DeFi rests on three building blocks: smart contracts, wallets and protocols. Each one does a different job, and together they replace the back office of a traditional financial firm.
Smart contracts
A Smart Contract is a program stored on a blockchain that runs automatically when its conditions are met. In DeFi, contracts hold funds, check collateral, calculate interest and execute trades. Once deployed, a contract usually cannot be changed unless its authors built in an upgrade option, and anyone can read its code.
Wallets
A crypto wallet is the user's identity and account in DeFi. There is no sign-up form or ID check at the protocol level. The wallet holds the private keys, and whoever controls the keys controls the assets. This is often called self-custody.
Protocols
A protocol is a set of smart contracts that together provide a service, such as a lending market or an exchange. Users interact with the protocol through a website or app, but the funds sit in the contracts, not with the website operator. Some protocols are governed by communities of token holders who vote on changes.
Imagine swapping one token for another. You connect a wallet, approve the swap and sign a transaction. A contract takes your token, gives you the other one at a price set by its formula, and the whole exchange settles on the blockchain in seconds or minutes. You also pay a network fee, which can be high when the network is busy.
DeFi vs traditional finance (TradFi) and CeFi
TradFi (Traditional Finance) means banks, brokers, insurers and payment companies that operate under national regulation. CeFi, or centralized finance, means crypto companies such as centralized exchanges and custodial lenders. They run crypto services but hold customer assets themselves, like a traditional firm would. DeFi differs because the service is delivered by open code and the user keeps the keys.
| Feature | TradFi | CeFi | DeFi |
|---|---|---|---|
| Who holds the assets | The institution | The company | The user's wallet or the contract |
| Access | Account opening and identity checks | Account opening and identity checks | Any compatible wallet, at protocol level |
| Who sets the rules | Firm and regulator | Company terms of service | Open code, sometimes token holder votes |
| Opening hours | Often limited | Usually 24/7 | 24/7 |
| Customer support | Yes, with complaint routes | Usually yes | Usually none |
| Main risk | Institution failure, fees | Company failure, misuse of funds | Code bugs, user error, scams |
Some projects blend the two approaches. The term CeDeFi is used for services that mix centralized features, such as company-run custody or compliance checks, with decentralized components. The boundary is not always clear, so it is worth reading how each service describes who controls the funds.
Main DeFi use cases
Most DeFi activity falls into a handful of categories. Many of them depend on each other.
- Decentralized exchanges. A DEX (Decentralized Exchange) lets users trade tokens directly from their wallets without handing funds to a company. Many DEXs use pools of tokens instead of order books.
- Lending and borrowing. In Crypto Lending markets, users deposit tokens to earn interest, and others borrow by locking up more value than they take out. Interest rates are usually set by supply and demand through formulas.
- Stablecoins. A Stablecoin is a token designed to track the value of another asset, most often a currency such as the US dollar. Stablecoins are widely used in DeFi as a trading and settlement unit. Their design, backing and risks vary a lot.
- Yield farming. Yield Farming (Liquidity Mining) means moving crypto between protocols to collect fees or reward tokens. Returns change quickly and can disappear.
- Derivatives and other products. Some protocols offer perpetual futures, options, tokenized funds, insurance or liquid staking, where staked tokens are represented by a tradable token.
Ethereum.org lists further uses, including payments and the tokenization of real-world assets, while noting that some of these areas are still new.
Key concepts
A few terms appear again and again when reading about DeFi.
Liquidity pools and AMMs
A Liquidity Pool is a smart contract that holds two or more tokens so that others can trade against them. People who deposit tokens into a pool are called liquidity providers, and they usually earn a share of trading fees. An AMM (Automated Market Maker) is the formula that sets prices inside the pool based on the ratio of tokens it holds, which removes the need for a traditional order book.
TVL
TVL (Total Value Locked) measures the value of assets deposited in a protocol or across DeFi. It is a popular size indicator, but it moves with token prices and can count the same funds more than once when apps are stacked on each other. As of 20 October 2026, the data site DefiLlama showed total DeFi TVL of roughly 89 billion US dollars, with Lido, Aave and Morpho among the largest protocols listed. These figures change daily.
Governance tokens
Some protocols issue governance tokens that give holders a vote on parameters such as fees, supported assets or upgrades. Voting power is often tied to the amount held, so a few large holders can have a big say. Governance tokens can also trade on markets and carry their own price risk.
Benefits of DeFi
People are interested in DeFi for several reasons. These are potential benefits, and each comes with trade-offs.
- Self-custody. Users hold their own assets, so there is no company that can freeze an account or fail with their deposit. The flip side is that lost keys usually mean lost funds.
- Open access. In general, anyone with a wallet and an internet connection can use a protocol, without applying for an account. Local laws and front-end restrictions may still apply.
- Transparency. Transactions and contract code are visible on the blockchain, so anyone can inspect how a protocol works and how funds move.
- Always-on markets. Services run around the clock, including weekends and holidays.
- Composability. Apps can plug into each other, which speeds up experimentation and new products.
- Programmable money. Payments, loans and trades can follow automatic rules without manual processing.
Risks of DeFi
DeFi can lose you money in ways that a bank account usually does not. There is typically no deposit insurance, no customer service desk and no way to reverse a transaction signed by mistake. The Financial Stability Board, an international body, noted in its 2023 report that DeFi inherits weaknesses from traditional finance such as leverage and liquidity mismatches, and that its transparency and data gaps make risks hard to monitor.
Smart contract bugs and hacks
Code can contain errors, even after an audit. Attackers have drained protocols by exploiting bugs, manipulating price feeds or compromising the keys of administrators. An audit lowers risk but does not remove it.
Scams and rug pulls
Because anyone can create a token or app, fake projects are common. In a rug pull, the creators attract deposits and then withdraw the funds. Phishing sites that copy real DeFi apps and ask users to approve harmful transactions are another frequent problem.
Impermanent loss
Liquidity providers can end up with less value than if they had simply held their tokens. This is called impermanent loss and it happens when token prices move apart. Uniswap documentation explains that trading fees may or may not make up for it, depending on how much trading happens.
Liquidation and market risk
In borrowing markets, falling collateral prices can trigger automatic liquidation, where the contract sells collateral to repay the loan. Prices of crypto assets can also be very volatile, and some stablecoins have lost their peg in the past.
Regulatory uncertainty
Rules for DeFi are still developing. In the European Union, the MiCA regulation says services provided in a fully decentralised manner without any intermediary fall outside its scope, but legal commentators note that the term is undefined and that protocols with identifiable controllers may still be covered.
In Türkiye, Law No. 7518 of 2 July 2024 placed crypto asset service providers under capital markets rules supervised by the Capital Markets Board (CMB, or SPK in Turkish). Those rules mainly address centralized platforms, and we did not find a specific DeFi rule. How the law applies to a given protocol or activity is a question for a qualified adviser.
You can lose all the funds you put into a DeFi protocol. High advertised yields usually signal high risk. Never share your seed phrase, and treat any unexpected request to connect a wallet or approve a transaction with suspicion.
How people get started safely
There is no safe shortcut in DeFi, but careful habits reduce avoidable mistakes. The steps below describe common precautions, not a recommendation to use any product.
- Learn the basics first: wallets, seed phrases, network fees and how a transaction is signed.
- Use a reputable wallet from its official source, and write the seed phrase down offline. Never store it in photos, chat apps or cloud notes.
- Start with a small amount you can afford to lose, and test a transaction with a tiny sum before larger ones.
- Check the project: how long it has run, whether it has published audits, who maintains it and what happens if something fails.
- Open protocols only through links you have verified yourself, and bookmark them to avoid fake copies.
- Review token approvals regularly and revoke those you no longer need.
- Keep records of your transactions, because tax treatment depends on your country and personal situation.
Tax and legal treatment of DeFi differs between countries. People in Türkiye should check current local rules with a qualified tax or legal adviser before taking part.
The future of DeFi
No one can say how DeFi will develop, and this section describes trends rather than predictions. Several themes are visible as of 2026.
- Regulatory clarity. Authorities in many places are writing crypto rules. The European Commission is due to review how MiCA treats DeFi, so the position there may change.
- Tokenized real-world assets. Projects are experimenting with bringing traditional assets on chain, a theme ethereum.org also lists among newer areas.
- Hybrid models. Services that combine regulated, company-run front ends with on-chain settlement are being tried, which is where terms like CeDeFi come from.
- Better user experience and security. Wallets, audits and monitoring tools continue to improve, although new attack methods keep appearing.
- Links with traditional finance. The FSB has warned that risks could grow if DeFi becomes more connected to traditional markets.
Whether these trends continue will depend on technology, regulation and market conditions. Anyone following the topic should check recent, reliable sources rather than relying on older articles, including this one.
Frequently asked questions
What is DeFi in simple terms?
DeFi is a way to use financial services such as trading, lending and earning interest through apps on a blockchain instead of through a bank. The apps run on smart contracts, which follow public rules automatically. You use your own crypto wallet to connect, so you keep control of your assets, and you also carry the risks.
How does DeFi work?
DeFi works through smart contracts, which are programs on a blockchain that hold funds and carry out actions when conditions are met. A user connects a wallet to an app, signs a transaction, and the contract executes it, for example a token swap or a loan. Everything is recorded publicly on the blockchain, and no company approves each step.
Is DeFi safe?
DeFi carries real risks, so it is not safe in the way an insured bank deposit is. Smart contract bugs, hacks, scams, price swings and user mistakes can all cause losses, and transactions generally cannot be reversed. Audits and careful habits can reduce risk but not remove it. Only use money you could afford to lose completely.
What is the difference between DeFi and CeFi?
In CeFi, a company such as a centralized exchange holds your assets and runs the service, much like a traditional firm. In DeFi, open smart contracts run the service and you hold the keys in your own wallet. CeFi usually offers account recovery and support, while DeFi gives more control but puts more responsibility on you.
Can you make money with DeFi?
Some users earn interest, trading fees or reward tokens, but returns are not guaranteed and can turn negative. Prices can fall, fees can exceed gains, and protocols can fail or be hacked. Very high advertised yields usually reflect high risk. This is general information, not advice, so consider speaking to a qualified professional.
What are examples of DeFi platforms?
Commonly cited examples include Uniswap, a decentralized exchange, and Aave, a lending protocol. Lido, which offers liquid staking, is also listed among the largest by total value locked on DefiLlama as of October 2026. These are neutral examples, not recommendations, and rankings change often, so check current data yourself.
Is DeFi legal?
In most places DeFi is not banned outright, but the rules are still developing and differ by country. Some activities may fall under financial, tax or anti-money laundering laws. In Türkiye, crypto asset service providers are regulated under Law No. 7518, though we found no DeFi-specific rule. Check current local law with a qualified adviser.
Related terms
- Smart Contract
- DEX (Decentralized Exchange)
- AMM (Automated Market Maker)
- Liquidity Pool
- Yield Farming (Liquidity Mining)
- TVL (Total Value Locked)
- Stablecoin
- Crypto Lending
- TradFi (Traditional Finance)
- CeDeFi
Sources
- DeFi TVL (Total Value Locked) overview DefiLlama
- Decentralized finance (DeFi) ethereum.org
- The financial stability risks of decentralised finance (executive summary) Bank for International Settlements, Financial Stability Institute
- The Financial Stability Risks of Decentralised Finance Financial Stability Board
- Demystifying DeFi in MiCAR PwC Legal Germany
- Türkiye Introduces New Crypto Asset Regulations: A Landmark Development in Digital Finance CMS Law
- Understanding Returns (impermanent loss) Uniswap Docs
This glossary entry is for general information and education only. It is not investment, tax or legal advice. Crypto assets are high-risk; check official sources before you act.