DeFi, short for decentralised finance, is an umbrella term for financial services that run on smart contractsSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. on a blockchain, such as Ethereum. Instead of a bank or broker, software handles the lending, swapping and holding of funds.
How does DeFi work?
You connect your own crypto walletCrypto walletAn app or device that holds the keys to your crypto and lets you receive, store and send it. directly to the service and deal with the smart contract itself. Nobody has to approve you as a customer, and the service is open around the clock.
Examples of DeFi:
- Trading. On decentralised exchanges (DEX)Decentralised exchange (DEX)An exchange run by smart contracts, where people swap crypto straight from their own wallets with no company in the middle., you swap one token for another.
- Lending. You lend crypto to earn interest, or borrow using crypto as collateral.
- Stablecoins. StablecoinsStablecoinA cryptocurrency designed to keep a steady price, usually by tracking the US dollar or another currency. are widely used in DeFi, because they aim to hold a steady value.
What are the risks?
DeFi is far riskier than ordinary banking:
- Bugs in the code. If a smart contract has a flaw, hackers can drain it. The money is then usually gone.
- No deposit protection. No guarantee fund covers your losses, and no customer service team can reverse a transaction.
- Scams. Some projects are set up purely to steal money, for example through a rug pullRug pullA scam where the people behind a new token or crypto project collect money from buyers and then vanish with it, leaving the token worthless., where the founders disappear with the funds.
- Automatic liquidation. If the value of your collateral falls, the loan can be closed automatically and you can lose the collateral.
- Little consumer protection. Services that are fully decentralised, with no intermediary at all, fall outside MiCA.
If you try DeFi, start with small amounts and remember that the responsibility is entirely yours.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 18 October 2026.