DeFi: decentralized finance without intermediaries, and its risks

DeFi (decentralized finance) refers to financial applications that run on smart contracts: exchanges, lending, staking or liquidity pools. Users connect their own wallet to the app and control their funds without opening an account with an institution. The rules are visible in the code, and transactions are visible on the blockchain.

With no intermediary, the user bears the risk of code bugs, price manipulation, fraud (a rug pull, i.e. the creators suddenly pulling liquidity) and sharp changes in the value of collateral. High yields usually reflect high risk. “Decentralized” can also be a marketing slogan, because many projects have administrators who can change the rules. The legal status of DeFi services is sometimes unclear.