What is DeFi?

The category was named around 2018, but DeFi went mainstream in the summer of 2020. Compound launched its COMP governance token on June 15, 2020, rewarding lenders and borrowers with daily token drops. That sparked "yield farming" and the wave known as DeFi summer. Uniswap V2 had launched a month earlier, in May 2020, providing the AMM rails most of those farms ran on.

The four core actions are swapping tokens on decentralized exchanges like Uniswap, lending and borrowing on Aave or Compound, earning yield on stablecoins, and providing liquidity to AMM pools. Newer categories include perpetual futures, on-chain options, liquid staking, and tokenized real-world assets like Treasury bills.

No — DeFi can cost you your entire deposit, and it is not risk-free just because it's auditable. The main failure modes are smart-contract bugs, oracle manipulation, stablecoin depegs, and malicious wallet approvals, any one of which can drain a position to zero with no customer support to call. The Ronin bridge hack in March 2022 lost about $625 million to North Korea's Lazarus Group. Stick to long-running, audited protocols and start with small amounts you can genuinely afford to lose.

CeFi (centralized finance) means a company custodies your money — Coinbase, Binance, and the bankrupt firms Celsius and BlockFi are all CeFi. DeFi offers the same product categories (trading, lending, yield) but executes through smart contracts you use directly from your own wallet. Nobody can freeze your account, and nobody is insuring it either.

Usually no — most DeFi protocols have no company to ask. Your wallet is your account. Some front-ends restrict certain jurisdictions, and moving funds back to a centralized exchange will trigger KYC. The underlying smart contracts remain permissionless.

Impermanent loss is the gap between holding two tokens yourself and depositing them into an automated-market-maker pool like Uniswap, which happens whenever the tokens' price ratio moves after you deposit. The AMM automatically rebalances the pool by selling the token that's rising and buying the one that's falling, so a liquidity provider ends up with less of the winning asset than if they had just held both tokens outright. It's called 'impermanent' because the loss only becomes permanent if you withdraw while the price ratio is still skewed — but for a large enough price swing, it can still outweigh the trading fees the pool paid you.

There's no fixed minimum to start using DeFi, but gas costs make the practical floor higher on Ethereum mainnet than on a Layer 2. On a Layer 2 like Base or Arbitrum, a swap or a lending deposit typically costs a few cents to a couple of dollars in gas, so even $20–$50 is enough to try the mechanics without fees dominating the outcome. On Ethereum mainnet, a single swap can cost anywhere from a few dollars to well over $20 depending on congestion, which makes mainnet impractical for testing with small amounts. The realistic floor is whatever amount keeps gas a small fraction — not the majority — of what you're depositing; below that, you're paying more in fees to learn than you'd lose from any mistake.

For most basic DeFi activities — simple lending, staking, or providing liquidity — no, you generally cannot lose more than what you deposited; the worst case is your position going to zero. Depositing into a lending pool, staking a token, or supplying liquidity to an AMM are self-contained positions: a smart-contract exploit, an oracle failure, or a stablecoin depeg can wipe out the value of what you put in, but they don't create a debt that follows you beyond that. The exception is leveraged or margin-based activity — borrowing against collateral to open a bigger position, or trading perpetual futures — where you can end up owing more than your original stake if the market moves fast enough that liquidation can't fully cover the loss, particularly during a sharp price gap. Plain lending, staking, and LPing cap your downside at your deposit; leverage does not always.

In most jurisdictions, yes — DeFi yield and swaps are generally taxable events, though the exact treatment depends on your country's tax rules. This is educational only, not tax or financial advice — consult a tax professional for your specific situation. In the US, for example, the IRS treats crypto as property: swapping one token for another is a taxable disposal, and staking or lending rewards are typically ordinary income at their fair market value when you receive them. Other jurisdictions apply similar logic even though rates, exemptions, and holding-period rules differ widely from country to country. Because a single DeFi session can involve several swaps and reward claims, active DeFi use tends to generate more taxable events than simply buying and holding — worth planning for before you dive in. See /tax/defi-taxes for a fuller breakdown of how swaps, yield, and liquidity-pool activity are each treated.

Liquid staking lets you stake an asset like ETH to earn staking rewards while receiving a liquid, tradeable token back that represents your staked position, so your capital isn't locked out of DeFi while it's earning yield. Normally, staking ETH directly means it's locked up for the staking period, but liquid staking protocols issue a receipt token 1:1 against your deposit that can then be used as collateral, swapped, or supplied into other DeFi protocols just like any other asset — letting the same capital earn staking yield and participate in lending, liquidity pools, or borrowing at the same time. It has grown into one of the largest single categories of DeFi by value locked. For a comparison of where to actually stake, see our guide to the best crypto staking platforms.

A smart contract is code deployed on a blockchain that automatically carries out an agreement's terms once its conditions are met, with no company or person approving or holding funds in the middle. In DeFi, it replaces the bank or broker — your wallet interacts directly with the code, which executes exactly as written every time.

Losing money to a DeFi hack, scam, or exploit follows the same urgent playbook as any other crypto loss: stop sending anything else, save the transaction hash and wallet addresses involved, and act within the first hour, since a fast-moving exploit can move funds through a mixer within minutes. See /fix for the full breakdown of what's actually recoverable, the exact information to give an exchange or law enforcement, and the recovery-service scams to avoid along the way.

A rug pull is an inside job — the team behind a protocol drains its own liquidity pool or mints and dumps tokens, walking away with user funds they controlled the whole time. A hack is an outside attack, where a stranger exploits a bug in the code or manipulates a price oracle to steal funds the team never intended to take. Both wipe out your deposit, but a rug pull means the people you trusted did it on purpose, while a hack means an attacker found a flaw they trusted didn't exist.

Start by looking up the protocol's audit reports from a named firm like OpenZeppelin, Trail of Bits, or CertiK, and read the summary of what was and wasn't covered — an audit that only checked one contract doesn't cover the rest of the app. Then check how long the protocol has actually been live and handling real money; a longer track record with no major incident is a stronger signal than a fresh launch, however well-marketed. Finally, look at its total value locked (TVL) history on a site like DeFiLlama — steady or growing TVL over months suggests real, ongoing user trust, while a sudden spike followed by a cliff is a common rug-pull pattern.

Any well-known self-custody wallet like MetaMask or Rabby works to get started — see /learn/what-is-a-crypto-wallet for how wallets work and how to pick one. Whichever wallet you choose, write down its seed phrase on paper and never type it into a website; see /learn/what-is-a-seed-phrase for how to store it safely. For anything beyond a small, active DeFi balance, pair that wallet with a hardware cold wallet — /learn/cold-wallet-vs-hot-wallet explains when a hot wallet is fine and when it's worth the extra step.

It depends entirely on which network you're using — the same swap can cost cents on a Layer 2 or several dollars on Ethereum mainnet during congestion. See /fees/ethereum-gas-fees for current fee ranges and what drives them up or down.