What is DeFi?

In traditional finance, every step has an institution behind it. A bank keeps your deposit, a broker routes your order and a clearing house settles the trade. In DeFi, code published on a blockchain takes over those roles. Each piece of code is a smart contract: once deployed, it does exactly what it was written to do, for anyone who calls it.

Most of this activity happens on Ethereum and on networks that copy its design, including layer 2 networks such as Arbitrum One and Base. To take part, you connect a self-custody wallet like MetaMask to an app and approve each transaction yourself.

What can you do with DeFi?

• Swap tokens. Decentralised exchanges replace the order book with pools of two tokens supplied by other users. A formula sets the price from the ratio in the pool. Uniswap pioneered this model; see our page on buying Uniswap.
• Lend and borrow. You deposit crypto into a lending protocol and earn interest from borrowers. Borrowers must lock up more collateral than they take out. If the collateral falls in value too far, the protocol sells it automatically. Aave is the largest example.
• Use stablecoins. Many apps price everything in dollar or euro tokens, because their value moves less than other crypto.

Many protocols are governed by holders of their own token, such as AAVE or UNI, who vote on changes. Those governance tokens trade on ordinary exchanges, so you can buy them without using DeFi at all.

What are the risks?

Ethereum.org itself describes DeFi as new and experimental. The main risks are practical ones:

• Bugs and exploits. A contract with a mistake in it will still run. Attackers look for such mistakes, and some protocols have lost large sums this way.
• Liquidation. A sharp price drop can trigger the sale of your collateral before you have time to react.
• No one to call. Approve a malicious contract or send funds to the wrong address, and nobody can reverse it.
• Fees. Every action costs network fees, which vary with demand; see what gas fees are.

Is DeFi covered by MiCA?

Largely not. According to recital 22 of the EU's crypto rules, services provided in a fully decentralised way, without any intermediary, fall outside MiCA. That means there is no licensed firm that has to follow conduct rules or that you could complain to. Where a company does sit in the middle and provides the service, the rules apply. The European supervisors have repeatedly warned consumers that they can lose all the money they put into crypto.

How do people usually get started?

You first need crypto in a wallet you control. Most people buy it on a MiCA-licensed exchange and then withdraw it to their own wallet over the right network. Our comparer shows which licensed platform gives you the most ETH for your euros, and the wallet guide explains the options for holding it yourself. Starting small and reading how an app works before you approve anything is a sensible habit.