Learn / Beginner · DeFi and Apps

What is DeFi?

Beginner · DeFi and Apps · about 5 min read

DeFi is short for decentralised finance. It means financial services such as trading, lending and borrowing that run on a blockchain through smart contracts, with no bank or broker in the middle.

How it works

A smart contract is a program on a blockchain that follows rules written in code. In DeFi, those programs hold the money and carry out the deal. To use one, you connect your own wallet to an app. There is usually no sign-up form, and most of these apps are open at any hour.

Two common examples are decentralised exchanges, where people swap one token for another directly from their wallets, and lending apps, where people lend tokens to earn interest or borrow against tokens they put up as security.

Why it matters

DeFi shows what blockchains can do beyond sending money. Anyone with a wallet and an internet connection can use the same tools, and the rules of many apps are written in open code that anyone can read.

Keep in mind

• A mistake in the code can be exploited, and money has been lost to hacks in DeFi apps.
• There is no help desk. Transactions cannot be reversed, and you keep your own keys.
• If you borrow against your tokens and their price falls far enough, the app can sell them automatically to cover the loan.
• Fake apps that copy real ones are common. Check you are on the right one before connecting your wallet.

A walk-through: swapping on a decentralised exchange

1. You open the app and connect your wallet. Your coins stay in your wallet.
2. You pick the token you hold and the token you want, and enter an amount.
3. The app shows the rate and a network fee. Check the price impact, which is how far your own trade moves the price, and the slippage setting, which is how much worse than quoted you will accept.
4. Your wallet asks you to approve the app to use your token, and then to confirm the swap. These are separate permissions.
5. The smart contract swaps the tokens and sends the new ones to your wallet.

As a simple example, if you expected 100 tokens and received 97, the slippage was 3 percent. On a thinly traded token it can be much more.

How lending works

Ethereum's guide gives a typical example: you deposit a stablecoin into a lending protocol and receive a token that represents your deposit. The balance grows with interest and you can withdraw it when you wish. Borrowing works the other way. You lock up tokens worth more than the loan as security. If their price falls far enough, the app sells them automatically to repay the lender, which is called liquidation, and you lose the security.

How DeFi differs from a bank

Ethereum's guide lists the differences: you hold your own funds instead of a company holding them, many services need no identity or credit check, markets stay open at all hours, transfers can settle in minutes, and the rules sit in public code. Every one of those has a flip side. With no company holding your funds, no company can reverse a mistake. With no identity checks, there is no customer file for anyone to consult. A bank deposit may be insured; a DeFi deposit generally is not.

Where DeFi goes wrong

• Bugs and exploits. Ethereum's guide says these products, like any software, can suffer from bugs and exploits. Contracts are public and can be audited, but users rely on skilled community members to read the code and flag problems. An audit reduces risk and does not remove it.
• Fake apps. Copies of real apps ask you to connect and approve. Check the address and use a bookmark.
• Unlimited approvals. Approving more than you need leaves a permission open that a flawed or hostile contract can use later.
• High yields. A return far above ordinary rates means someone is taking a risk with your money. Find out who.

In Trinidad and Tobago, the 2025 law temporarily prohibits virtual asset business in or from the country until 31 December 2026 unless the TTSEC has approved it. The TTSEC says personal use by individuals is not covered. See the rules lesson.

Common mistakes

• Trying a new app with your main wallet instead of a small spare one.
• Clicking "approve" without reading what is being approved.
• Borrowing close to the limit, so a small price fall triggers liquidation.
• Chasing the highest advertised yield.
• Leaving old approvals active long after you stopped using an app.

Try it yourself

Do not connect a wallet for this exercise.

1. Read the DeFi page on ethereum.org and note one lending example and one exchange example.
2. Choose a decentralised exchange and read its documentation. Find what it says about slippage and fees.
3. Write a short checklist you would run before connecting a wallet to any new app.

Key terms

DeFi, smart contract, decentralised exchange, lending app, security (collateral).

Sources and credits

DeFi examples, differences from banks and risks: ethereum.org, Decentralized finance. Trinidad and Tobago law: TTSEC fact sheet on the 2025 Act. General information, not financial advice.

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