What Is DeFi? Decentralised Finance Explained for Beginners

DeFi (decentralised finance) is a set of financial services, including trading, lending, borrowing and stablecoins, that run as smart contracts on public blockchains instead of through banks or brokers. Anyone with a compatible crypto wallet can use them. DefiLlama tracked about $90 billion deposited in DeFi protocols on 21 October 2026.

How does DeFi work?

DeFi applications are programs, called smart contracts, deployed on blockchains such as Ethereum, BNB Smart Chain, Solana and Ethereum's layer-2 networks. A user connects a self-custody wallet, approves a contract to move specific tokens, and signs a transaction. The contract then executes its rules exactly as written: swapping tokens, recording a loan or minting a stablecoin.

Three features make DeFi different. Transactions settle on-chain within seconds or minutes, at any hour. The code and every transaction are publicly visible. And protocols are composable: one contract can call another, so a single transaction can borrow from one protocol, swap on a second and deposit into a third. Composability is powerful, but it also means a failure in one protocol can spread to others.

DeFi vs traditional finance: what's the difference?

What are the core building blocks of DeFi?

• Automated market makers (AMMs) and liquidity pools: decentralised exchanges such as Uniswap and Curve price trades using a formula and pools of tokens supplied by users, instead of an order book. Liquidity providers earn a share of trading fees.
• Over-collateralised lending: protocols such as Aave and Compound let users borrow only after locking collateral worth more than the loan. This reduces, but does not remove, the risk of bad debt.
• Stablecoins: tokens designed to track a currency such as the US dollar. Some are backed by cash and bonds held by an issuer; others, such as DAI and USDS from Sky (formerly MakerDAO), are minted against collateral locked in smart contracts.
• Oracles: services that feed off-chain data, such as prices, into smart contracts. A faulty or manipulated oracle can trigger wrong liquidations.
• Flash loans: uncollateralised loans that must be borrowed and repaid within one transaction, used for arbitrage and liquidations, and sometimes for attacks.

Which DeFi protocols are the largest?

Total value locked (TVL) measures the market value of tokens deposited in a protocol. It shows scale, not profitability or safety, and it moves with crypto prices every day. The largest entry, Lido, is a liquid staking protocol; our guide to crypto staking and yield explains how staking rewards are generated and what can go wrong.

What are the main risks of DeFi?

• Smart-contract bugs: a coding error can let an attacker drain a protocol. Audits reduce this risk but do not remove it.
• Liquidation: if your collateral falls below the required ratio, it is sold automatically, often with a penalty.
• Impermanent loss: liquidity providers can end up with less value than if they had simply held the two tokens.
• Admin-key and governance risk: teams or token votes can change protocol rules, and malicious upgrades or rug pulls happen, especially in new projects.
• Stablecoin de-pegs: a stablecoin can lose its peg, as Terraform's UST did in May 2022.
• Phishing and approval scams: signing a malicious approval can give a scammer access to your tokens. See our checklist of crypto scam warning signs.

How can beginners approach DeFi more carefully?

• Start with a small amount you can afford to lose, in a separate wallet from your long-term holdings.
• Use long-running protocols, and check their history and TVL on independent dashboards such as DefiLlama.
• Type website addresses yourself and verify contract addresses before approving anything.
• Review and revoke old token approvals regularly, and follow our wallet security best practices.
• Keep records: swaps, lending interest and liquidity rewards are usually taxable events.

Does Wealtii use DeFi?

Wealtii executes fund purchases and sales on-chain through DEX aggregators at the best available quote, so price impact and slippage can apply. It does not lend, stake or deposit fund assets into yield protocols: assets are held 1:1 in a Gnosis Safe 3-of-3 multi-signature vault on BNB Smart Chain. How Wealtii's funds work explains the process. Wealtii is not regulated.

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