DeFi stands for Decentralized Finance. It refers to financial services such as swapping, lending or receiving interest (variable, not guaranteed) that are not provided by a bank or a company but by smart contracts on a blockchain.
You don't need an account, a registration or an ID check. You simply connect your own wallet to the application and confirm every action yourself. Your coins stay under your control until you deliberately transfer them to a smart contract.
The main areas
- Decentralized exchanges (DEX): Swapping tokens directly from your wallet, without an exchange as an intermediary. The price results automatically from the ratio of the tokens in a liquidity pool. Examples: PancakeSwap (BNB Smart Chain), Uniswap (Ethereum).
- Lending and borrowing: You provide tokens and receive interest for them (variable, not guaranteed). Borrowers must first deposit collateral worth more than the borrowed amount. Examples: Venus (BNB Smart Chain), Aave (Ethereum and others).
- Stablecoins: Tokens whose value is pegged to a currency such as the US dollar, for example USDC or USDT. They are the basis of many DeFi applications.
- Providing liquidity: You deposit two tokens in a liquidity pool and receive a share of the fees charged on swaps.
Advantages
- Open to everyone: Anyone with a wallet can take part, around the clock and worldwide.
- Traceable: The rules are in public code, and every transaction is visible on the blockchain.
- Self-determined: You keep your keys and approve every transaction yourself.
Risks
- Bugs in the code: A bug in the smart contract can be exploited. Stolen funds usually cannot be recovered.
- Fraudulent projects: Some projects are launched only to drain deposits (rug pull). A nice website says nothing about security.
- Approvals: For a smart contract to be allowed to move your tokens, you grant an approval. It is often unlimited and remains in place even if you no longer use the application.
- Price fluctuations: If you provide liquidity, price movements can mean you get back less than you deposited (impermanent loss).
- No customer service: There is no one who can reverse a wrong transaction or reset a forgotten password.