Decentralized Finance (DeFi) is a concept that has emerged in the cryptocurrency market. It is when traditional financial services are provided through smart contracts that anyone can engage with.
DeFi uses blockchain technology to let anyone lend, borrow, trade, and earn interest—without needing approval from a central authority.
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is a financial system that runs on blockchain technology, removing banks and other middlemen from transactions.
DeFi automates financial agreements using smart contracts and self-executing code. Users are unrestricted by their geographic locations. Anyone with an internet connection and a crypto wallet can use DeFi.
Individuals without bank accounts, often in distanced locations in Africa, can consider DeFi instead.
These services are facilitated by DeFi applications (called dApps), which handle financial operations and transactions within blockchains without an intermediary and even take out loans using their crypto as collateral.
How DeFi Works in Crypto
DeFi replaces banks and middlemen with smart contracts—self-executing code on a blockchain built and maintained by developers to automate financial transactions. Instead, users transact with each other.
You interact directly with decentralized systems instead of relying on institutions to approve loans, hold savings, or process payments.
These platforms let you lend, borrow, trade, earn interest, speculate on asset prices, and even insure against risks, all without needing permission from a bank or financial authority.
Everything happens on public blockchains, meaning transactions are transparent and accessible to anyone. You control your funds at all times, but that also means you’re responsible for security and risk.
What is a decentralized exchange (DEX) in crypto?
A decentralized exchange (DEX) allows you to trade cryptocurrencies without a middleman. Instead of a company holding your funds and processing trades, smart contracts handle everything on a blockchain.
DEXs use liquidity pools. These are pools of crypto that users deposit to enable trading. When you swap tokens, you’re not matching with another trader—you’re exchanging with the pool. This system ensures there’s always liquidity, meaning you can trade whenever you want.
In return for supplying crypto to these pools, users (called liquidity providers) earn a share of the trading fees.
DeFi applications, protocols, and uses
There are thousands of DeFi apps you can start using today. Below are the most popular DeFi uses in today’s markets.
Staking
The simplest form of DeFi is staking. Your tokens are used to validate the network (cryptocurrencies that allow staking are Ethereum, Solana, and, most recently, Algorand) or locked in exchange for rewards, usually in the form of APY.
Lending protocols
Let’s say you buy Bitcoin. Rather than keeping it in your wallet, you can lend Bitcoin in DeFi protocols and earn interest on your digital holdings. If Bitcoin is too volatile for you, there are stablecoins, digital assets that are pegged to the US dollar (1 stablecoin is worth $1), and those assets can be used for lending in DeFi applications.
Liquidity pools
Providing liquidity to DEXs allows you to earn a share of the fees and often includes a passive yield in the form of APY/APR. There are many DEXs to choose from. For ETH, Uniswap is the most popular DEX. For BNB Smart Chain, PancakeSwap is in the lead.
Prediction markets
Prediction markets are becoming very popular in 2025. Platforms like Polymarket let users bet on real-world events with blockchain-verified transparency, allowing traders to profit from correctly predicting political, sports, and finance outcomes. Being a liquidity provider in a prediction market earns you a share of the fees for every buy and sell transaction.
Liquid staking and restaking
For advanced users, there are DeFi platforms that give you the ability to boost your earnings even further. In short, you can stake your assets and still have access to the liquidity, allowing you to put it to use in other DeFi applications. Learn more about liquid staking and restaking.
DeFi vaults
If managing your DeFi investments is a struggle, DeFi vaults may be an optimal solution. Depositing your crypto into vaults that diversify DeFi strategies may be ‘easier’ to manage than doing all the work on your own.
Morpho Vaults are a great example. A vault can be focused on lending against liquid staking tokens (LSTs) where exposure is contained to specific LSTs collateral assets (as opposed to traditional lending platforms). Choose your vault based on your risk appetite and expected returns.
MEV Capital Usual USDC is an example. The vault has over $230M deposits (USDC) with a projected 17.67%. Bear in mind that there are performance fees (which could differ) from vault to vault.
Benefits of Decentralized Finance
1. With DeFi, you hold your funds in your own wallet. There’s no bank freezing your account, setting withdrawal limits, or blocking transactions—you’re in complete control.
2. Traditional banks require proof of identity, credit history, or residency. DeFi removes these barriers, allowing anyone with an internet connection and crypto wallet to access financial services – without waiting for approval or processing delays
3. All transactions are recorded on public blockchains. You can verify trades and loan agreements, reducing fraud and hidden fees. It also offers global reach, bypassing the hassles of currency exchange, banking hours, and international limitations.
4. Smart contracts allow complex financial operations—like automated loans, instant settlements, and dynamic interest rates—without human intervention, making transactions more efficient and cost-effective.
5. Lending doesn’t rely on traditional credit scores. Instead, users provide crypto as collateral, enabling anyone to access loans without proving income or creditworthiness.
Risks of Decentralized Finance
1. DeFi operates without legal safeguards. If a transaction goes wrong, there’s no customer support, refunds, or legal recourse. Scammers and anonymous parties can vanish with funds, making recovery nearly impossible.
2. Losing your private key means permanently losing access to your funds. DeFi transactions can’t be reversed, so sending crypto to the wrong address results in permanent loss with no recovery options.
3. Many DeFi platforms claim full transparency but rely on vulnerable code. Hacks, rug pulls, and misleading investment schemes have led to billions in losses, especially for users who fail to research projects properly.
How to start with DeFi
Getting started with DeFi is simple. You only need a crypto wallet, some funds, and access to a DeFi application. Here’s a step-by-step guide:
1. Set up a DeFi wallet
A DeFi wallet is a digital wallet that lets you store, send, and interact with decentralized apps (dApps). Unlike traditional wallets, you control the private keys, meaning no bank or company can access your funds.
Popular wallet types include browser extensions and mobile apps. When setting up, you’ll receive a recovery phrase. Write it down and keep it safe. If you lose it, you lose access to your funds.
2. Add crypto to your wallet
To use DeFi, you’ll need cryptocurrency. Get crypto from an exchange and send it to your wallet—here are some of our best DeFi coins. Some wallets also let you swap tokens directly within the app. Always double-check addresses before sending funds, as transactions cannot be reversed.
3. Start using DeFi apps
Each platform has different rules, so always review the details before committing funds.
Is DeFi safe?
DeFi removes banks and middlemen, but that also means there’s no safety net. Security depends on smart contracts, which execute transactions automatically. If a contract has a flaw, hackers can exploit it.
One of the biggest DeFi hacks was the Ronin Bridge attack (2022), in which hackers stole over $610 million by exploiting a weak security setup. Another was the Poly Network hack (2021), in which $600 million was drained, though most funds were later returned.
Despite these risks, DeFi has security advantages.
Self-custody wallets mean no bank failures or account freezes. Blockchain transparency allows users to verify transactions, and several protocols now use insurance funds or third-party audits to enhance trust.
How much money do you need to start with DeFi?
There’s no fixed amount required to start using DeFi. Some platforms let you begin with as little as $1, while others require hundreds due to network fees and minimum deposit rules.
Some DeFi strategies require more capital. For example, staking might need a minimum deposit, and yield farming often works better with larger amounts to offset fees. However, lending and borrowing platforms allow flexible deposits, making them accessible to smaller investors.
Starting small is a smart approach. It lets you learn without risking too much. If you only have $50-$100, focus on low-fee networks and simple strategies like lending or staking. If you have more, explore yield farming and liquidity pools.
DeFi is open to all budgets, but transaction costs and risks make it important to start with an amount you’re comfortable experimenting with.
Summary
DeFi is reshaping finance, offering users full control over their money without middlemen. DeFi creates new ways to earn, invest, and interact with digital assets, from trading and lending to staking and prediction markets.
But it’s not risk-free. Hacks, high fees, and volatile markets can make DeFi a tough space for beginners. However, users can reduce risks with research and caution and take advantage of DeFi’s benefits.
According to combined reports from Mordor Intelligence and Statista, the DeFi industry is projected to reach a valuation of $80 billion and attract between 40 and 50 million users by 2030 as developers work to enhance security and reduce costs. As DeFi expands, it could become a mainstream alternative to traditional banking.
