What is DeFi?
Decentralised Finance refers to financial services — lending, borrowing, trading, and earning yield — executed through smart contracts on public blockchains rather than through intermediaries like banks or brokerages. There is no customer support line. There is no deposit insurance. Code is the counterparty.
Core primitives
Automated Market Makers (AMMs) replace the traditional order book with liquidity pools. Traders swap assets against pooled liquidity; liquidity providers earn a fee on every swap proportional to their share of the pool.
Lending protocols allow users to deposit assets as collateral and borrow against them. Liquidation mechanisms enforce solvency automatically when collateral ratios fall below protocol thresholds.
Yield aggregators route capital between protocols to optimise returns, compounding rewards automatically across multiple underlying strategies.
“DeFi removes intermediaries — and with them, the legal protections those intermediaries provide. That trade-off must be understood before capital is deployed.”
Key risks
- Smart contract risk — Bugs in protocol code can be exploited, resulting in total loss of deposited funds. Audits reduce but do not eliminate this risk.
- Impermanent loss — Liquidity providers can end up with less value than simply holding assets if the price ratio of pooled assets shifts significantly.
- Oracle manipulation — Protocols relying on price feeds can be exploited through flash-loan-driven price manipulation.
- Regulatory risk — The regulatory treatment of DeFi income and governance token holdings is evolving rapidly across all major jurisdictions.
How to assess a DeFi protocol
Before deploying capital, evaluate: audit history and auditor reputation, total value locked (TVL) trajectory, on-chain governance token distribution, protocol age and track record, and insurance coverage options.
Our DeFi reviews
See our DeFi protocol reviews for scored assessments of the leading protocols across lending, AMMs, and yield optimisers.