DeFi

## What it is

DeFi is built on public blockchains. Smart contracts define how each service works: they accept assets, calculate interest, prices, and payouts, and governance is often handed to token holders through a DAO. Users interact through their own crypto wallet rather than an account with a company.

## Main segments

Decentralized exchanges (DEXs) with automated market making based on liquidity pools, lending protocols with collateral and automatic liquidation, stablecoins, derivatives, smart contract insurance, staking, and yield aggregators.

## Where the risks come from

The main risks are vulnerabilities and bugs in smart contract code, manipulation of price oracles, sharp collateral sell-offs and cascading liquidations, fraudulent projects where developers withdraw funds (rug pulls), and impermanent loss for liquidity providers. A code audit reduces these risks but does not eliminate them.

## Regulation

Most protocols do not perform KYC or AML at the protocol level, but front ends, fiat on-ramps, and centralized exchanges through which money flows are subject to identification and monitoring requirements. The EU's MiCA regulation governs crypto-assets, while approaches differ across other jurisdictions, so requirements should be checked separately.

## Common mistakes

A typical beginner mistake is treating a high yield as risk-free. High returns usually compensate for the risk of token price changes, locked funds, or a possible exploit. People also often overlook network fees charged on every transaction and the fact that a wrong address or signing a malicious contract cannot be reversed.