Decentralised Finance (DeFi)
DeFi refers to financial services and instruments built on blockchain platforms using smart contracts — operating without central intermediaries (banks, brokerages, exchanges). Anyone with an internet connection and a crypto wallet can access DeFi protocols; they cannot be censored or shut down by any single entity.
Ethereum is the dominant DeFi platform, hosting the majority of DeFi value locked globally.
Core DeFi Primitives
Decentralised Exchanges (DEXs)
Trade cryptocurrencies without a central exchange. Use Automated Market Maker (AMM) algorithms instead of order books:
- Uniswap — largest DEX by volume; grew from 2.9B in 2020 alone
- Curve Finance — specialised for stablecoin swaps; very low slippage
- Balancer — weighted pools
Lending and Borrowing
- Aave — lend assets to earn interest; borrow against collateral; interest rates adjust algorithmically with utilisation
- Compound — similar lending model; pioneered the concept of yield farming via governance token rewards
- Borrowing is overcollateralised (e.g., deposit 100 USDC); liquidation bots enforce collateral ratios automatically
Stablecoins
- Decentralised stablecoins (DAI, FRAX, LUSD) are minted by smart contracts, backed by crypto collateral
- Centralised stablecoins (USDT, USDC) issued by companies but used extensively in DeFi
Ethereum hosts 60–70% of all global stablecoin supply ($150B+).
Yield Aggregators
- Yearn Finance — automatically moves funds between lending protocols to maximise yield
- Convex Finance — optimises Curve rewards
Liquid Staking
- Stake ETH and receive a liquid receipt token (stETH, rETH) usable in other DeFi protocols — double-dipping on yield
- Lido (~stETH) controls ~33% of all staked ETH
DeFi by Numbers (2024–2025)
| Metric | Value |
|---|---|
| Ethereum DeFi TVL | ~$60B+ |
| Global stablecoin supply on Ethereum | ~$150B+ |
| Largest DeFi protocol (Lido) | ~$30B+ TVL |
| Peak DeFi TVL (all chains, 2021) | >$100B |
How DeFi Works
DeFi dapps are accessed through Web3-enabled browser wallets (e.g. MetaMask, Rainbow, Coinbase Wallet). The wallet signs transactions that trigger smart contract logic — no account creation, no KYC, no counterparty trust required.
Smart contracts are composable — protocols can call each other, enabling complex strategies: borrow on Aave, swap on Uniswap, deposit in Yearn, all in a single transaction (“flash loan” pattern).
Risks
| Risk | Description |
|---|---|
| Smart contract bugs | Immutable code; a bug can be exploited permanently (DAO 2016, multiple protocol hacks) |
| Oracle manipulation | Price feeds can be manipulated, triggering incorrect liquidations |
| Liquidation risk | Overcollateralised loans are liquidated if collateral value drops |
| Regulatory risk | DeFi protocols face growing regulatory scrutiny globally |
| Concentration risk | Lido’s ~33% of staked ETH is a single point of concern for the network |
DeFi vs Traditional Finance
| Feature | Traditional Finance | DeFi |
|---|---|---|
| Access | Requires bank account, KYC | Anyone with a crypto wallet |
| Custody | Bank holds your money | You hold your keys |
| Transparency | Opaque internal systems | All transactions on-chain and auditable |
| Hours | Business hours, weekdays | 24/7/365 |
| Intermediaries | Banks, brokers, clearinghouses | Smart contracts only |
| Counterparty risk | Yes (bank can fail) | Smart contract risk instead |
Sources: wikipedia-2026-ethereum | ethereumorg-2026-what-is-ethereum | cryptoslate-2025-ethereum-tokens | prasad-2021-five-myths-cryptocurrency