Traditional finance organises payments, exchanges, loans, and savings through institutions. Decentralised finance, or DeFi, rebuilds some of those functions with smart contracts on public blockchains. The contracts hold assets and apply rules that users can inspect and invoke with a wallet.
A DeFi application might let you swap one token for another, lend assets to a shared pool, borrow against collateral, or earn fees by supplying liquidity. There may still be teams, websites, governance groups, and service providers, but the settlement logic and balances are recorded on-chain.
Its defining feature is open access to the contracts. A compatible wallet can interact without opening a conventional account, and another developer can connect one protocol to another. This composability is often compared to building with money legos: a lending position can become collateral elsewhere, while a trading pool supplies a price or yield source.
Composability creates efficiency, but also dependency. If one protocol has a bug, a bad price feed, or a failing asset, the effects can travel through every application built on top of it. Transparent code lets anyone inspect the rules, yet it also lets attackers study those rules and search for weaknesses.
DeFi does not remove intermediaries so much as replace some human discretion with software, incentives, and governance. Users take responsibility for private keys, transaction approvals, network fees, and contract risk. Returns are not protected merely because a dashboard uses the word earn.
Before depositing, it helps to ask where the return comes from, who can change the contracts, what assets back the position, how withdrawals work, and what happens during a market shock. Audits, long operating history, and diversified risk are useful signals, not guarantees.
The simplest DeFi action is often a token swap. But without a traditional exchange matching buyers and sellers, who provides the other side of that trade? Tomorrow we will unpack the automated market maker.