DeFi
DeFi is financial services built on smart contracts that run without a bank or a broker: swapping, lending, earning on deposits. The rules live in code, any wallet can use them, and there is no intermediary able to say no.
How it works
A smart contract stands where the bank used to. Loan terms, rates and liquidation rules are written into its code up front and execute automatically, identically for everyone. No application is reviewed, and nobody is there to decline it.
Your funds stay in your own wallet, or in a contract only your key controls. That is also the sharpest difference from an exchange: nobody can freeze the account, and nobody can return the money when you get something wrong.
Protocols slot into each other like parts: a receipt token from one becomes collateral in another, and its yield goes into a third. Convenient, and dangerous for exactly that reason, since a failure in the bottom contract drags the whole stack with it.
A worked example
You post 1 ETH at $2,400 as collateral and borrow USDT. The protocol lends up to 75% of the collateral and liquidates at 85%.
| Collateral | $2,400.00 |
| Borrowing limit, 75% | $1,800.00 |
| Borrowed | $1,200.00 |
| ETH price at liquidation | $1,411.76 |
Above $1,412 the position survives. Below it the protocol sells the collateral to clear the debt and keeps a penalty on top. No call, no warning: code does it.
Where the risk sits
- A bug in the contractCode is immutable once deployed, so a flaw often cannot be patched, and the attacker is the one who gets the funds out.
- The price oracleA protocol learns the price from outside. Manipulated or stale data triggers liquidations the market never called for.
- Liquidation is finalThere is nobody to reverse it or negotiate with. The only defence is collateral headroom.
- Network feesOn a busy network a single operation costs tens of dollars, which erases the point of small amounts.
- Yield printed out of thin airTriple-digit rates are often paid in the protocol's own token, whose price falls for precisely the reason it is being printed.