6.2[Advanced Topics & DeFi](https://wealtii.com/learn) # What Is DeFi? Decentralised Finance Explained for Beginners By [Zayd Ahmed](https://wealtii.com/editorial-policy#zayd-ahmed), Founder & CEO, Wealtii · Published 12 February 2026 · Last reviewed 21 October 2026 **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](https://wealtii.com/learn/smart-contracts-explained), 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? | Feature | Traditional finance | DeFi | | --- | --- | --- | | Access | Bank account, identity checks, credit checks | A crypto wallet; some front-ends block certain countries | | Opening hours | Business hours for many services | 24/7 | | Settlement | Hours to days | Seconds to minutes, on-chain | | Custody | A bank or broker holds your assets | You hold your keys; deposited tokens sit in smart contracts | | Transparency | Internal ledgers | Public code and transactions | | Consumer protection | Deposit insurance, complaints schemes, reversals | Usually none; most mistakes cannot be reversed | ## 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](https://wealtii.com/learn/staking-and-yield-generation) explains how staking rewards are generated and what can go wrong. | Protocol | What it does | TVL | | --- | --- | --- | | Lido | Liquid staking for ETH | About $23.7 billion | | Aave | Lending and borrowing | About $18.2 billion | | Sky (formerly MakerDAO) | Crypto-collateralised stablecoins | About $5.9 billion | | Uniswap | Decentralised exchange (AMM) | About $4.1 billion | | Compound | Lending and borrowing | About $1.5 billion | | Curve | Stablecoin-focused exchange | About $1.3 billion | ## 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](https://wealtii.com/learn/crypto-scams-and-red-flags). ## 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](https://wealtii.com/learn/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](https://wealtii.com/how-it-works) explains the process. Wealtii is not regulated. ## Frequently Asked Questions ### What is DeFi in simple terms? DeFi (decentralised finance) is financial services such as trading, lending, borrowing and stablecoins that run as smart contracts on public blockchains. Instead of a bank or broker approving each transaction, code executes the rules, and anyone with a compatible crypto wallet can use it. ### How does DeFi lending work? On lending protocols such as Aave, lenders deposit tokens into a shared pool and earn interest paid by borrowers. Borrowers must lock collateral worth more than the loan. If the collateral value falls below a set threshold, the protocol automatically sells it to repay the loan, which is called liquidation. ### Is DeFi safe for beginners? DeFi carries risks that bank accounts do not: smart-contract exploits, price-oracle failures, liquidations, scams and no deposit insurance or ombudsman. Beginners who use DeFi usually start with small amounts, well-established protocols and a separate wallet, and avoid yields they cannot explain. ### Is DeFi legal? Using DeFi protocols is legal in most countries, but rules are still developing. Regulators can act against the companies or people behind front-ends, sanctioned protocols are off-limits, and DeFi gains and income are usually taxable. Check the rules in your own country. ## Sources & References 1. [ethereum.org — Decentralized finance (DeFi)](https://ethereum.org/en/defi/) (accessed 21 Oct 2026) 2. [DefiLlama — DeFi total value locked dashboard (figures as of 21 Oct 2026)](https://defillama.com/) (accessed 21 Oct 2026) 3. [Aave documentation — Flash loans](https://aave.com/docs/developers/flash-loans) (accessed 21 Oct 2026) 4. [Uniswap documentation — Liquidity and automated market making](https://developers.uniswap.org/docs/get-started/concepts/liquidity-providers/concentrated-liquidity) (accessed 21 Oct 2026) 5. [ethereum.org — Oracles](https://ethereum.org/en/developers/docs/oracles/) (accessed 21 Oct 2026) Disclaimer: Educational content only, not financial advice. TVL figures change daily and digital assets are volatile; you can lose money. Wealtii is early-stage and is not regulated by any financial regulator. ## Further reading from official sources - [NIST: Blockchain Technology Overview](https://csrc.nist.gov/pubs/ir/8202/final) - [Bitcoin white paper](https://bitcoin.org/bitcoin.pdf) [Zayd Ahmed](https://wealtii.com/editorial-policy#zayd-ahmed) Founder & CEO, Wealtii Computer Science Engineer | 5+ Years in DeFi & Digital Assets