DeFi (Decentralized Finance) refers to financial protocols built on public blockchains (mainly Ethereum, Solana, Arbitrum, Base) that replicate traditional banking services without centralized intermediaries.
Main DeFi services:
- Decentralized exchanges (DEX): Uniswap, PancakeSwap, dYdX. Swap tokens directly from your wallet, no KYC, no deposit on a centralized exchange.
- Lending / borrowing: Aave, Compound. Deposit USDC to earn ~5% interest, or borrow against crypto collateral.
- Decentralized stablecoins: DAI (MakerDAO), LUSD (Liquity)
- Derivatives: GMX, dYdX (perpetuals), Synthetix (synthetics)
- Yield farming / staking: provide tokens to a protocol to earn yield
- Decentralized insurance: Nexus Mutual, Sherlock
Key metrics:
- TVL (Total Value Locked): capital deposited in protocols. All-time high $180B November 2021. Mid-2026: roughly $80-120B.
- APY: annualized yield offered (typically 4-15% on stablecoins, sometimes 50%+ on volatile tokens — beware)
Pros:
- Accessible 24/7, no approval, no KYC
- Composability: protocols stack like Lego ("money legos")
- Total transparency: open source code, on-chain auditable transactions
- Yields often higher than traditional finance
Major risks:
- Smart contract bugs: recurring hacks — about $3B stolen/year since 2020. Wormhole 2022: $320M stolen in minutes.
- Impermanent loss on liquidity pools
- Rug pull risk: team disappears with funds (common on new unaudited protocols)
- Regulatory risk: SEC/MiCA may classify some DeFi tokens as securities
- No recourse in case of loss (you're your own bank)
Pro rule: never put in DeFi more than you can afford to lose entirely. Prefer audited protocols (Aave, Uniswap, Lido) with TVL > $1B.