DEFI

What Is Decentralized Finance (DeFi)?

DeFi replaces traditional banking services with code.

It embeds financial rules into smart contracts that execute automatically on the blockchain, eliminating the need for manual approval. Users interact directly with these contracts through wallets to swap tokens, borrow and lend, earn yields, and settle transactions. The entire process is transparent, always available, and operates 24/7.

DeFi activity is most common on Ethereum and its Layer 2 networks, but exists on other blockchains as well. Key metrics to measure DeFi's growth include Total Value Locked (TVL), decentralized exchange (DEX) trading volume, and stablecoin supply.

Why Should You Learn About Decentralized Finance (DeFi)?

DeFi makes global financial services accessible to more people at a low entry barrier.

Fees are typically lower, requirements are minimal, and anyone can participate with just a wallet—making it suitable for trying out with small amounts and learning gradually. All transactions are recorded on-chain, increasing transparency and enabling self-auditing and understanding of financial mechanisms.

A core feature of DeFi is its "composability": one protocol's functions can be combined with another's, much like building blocks. For example, you might first provide collateral, then borrow stablecoins to participate as a liquidity provider (LP). While this fosters innovation, it also adds complexity, requiring learning and caution.

How Does Decentralized Finance (DeFi) Work?

DeFi uses smart contracts to receive and enforce financial rules, enabling direct wallet interaction.

Smart contracts are programs deployed on the blockchain that execute automatically when certain conditions are met. For instance, "deposit collateral to borrow stablecoins; if collateral falls below a threshold, liquidation is triggered." These rules are coded in advance and are fully transparent.

Your wallet serves as your account and key—holding your private key gives you control over your funds. Wallets often come as browser extensions or mobile apps; when making transactions, you sign and authorize them, while the contract manages your assets according to its rules.

DEXs typically use automated market makers (AMMs), where two tokens are pooled together and priced by formula, allowing anyone to swap tokens directly. Those who supply liquidity to these pools are called liquidity providers (LPs); they earn trading fees but also face risks from price fluctuations and impermanent loss.

Most lending protocols rely on "overcollateralization" to manage risk: the borrowed amount is less than the collateral's value. If the collateral value drops below a set threshold, liquidation is triggered and assets are sold to cover debts. Prices are supplied by "oracles"—services that securely feed exchange or on-chain prices into smart contracts. Oracles ensure contracts have reliable external data.

What Are the Main Use Cases of DeFi in the Crypto World?

DeFi is primarily used for token swaps, lending and borrowing, yield generation, derivatives trading, and stablecoin settlement.

For token swaps, users commonly use DEXs like Uniswap to exchange one token for another—especially for niche assets or when avoiding centralized platforms.

For lending and borrowing, protocols like Aave allow users to deposit major cryptocurrencies as collateral and borrow stablecoins for payments or other strategies; maintaining an adequate collateral ratio is essential to avoid liquidation.

For yield generation, LPs earn trading fees or utilize yield aggregators that allocate assets across multiple strategies. There is also staking for network rewards, but it's crucial to verify the legitimacy and sustainability of returns.

For stablecoin settlement, stablecoins facilitate pricing and transfers with reduced volatility—making them ideal for cross-border payments or on-chain purchases.

DeFi is often used alongside exchanges. On Gate, a typical flow involves buying mainstream tokens on the spot market, withdrawing to an Ethereum or Layer 2 wallet address, then using DEXs for liquidity mining or participating in lending protocols—bridging the gap between fiat onramps and on-chain strategies.

How Can You Reduce Risks in DeFi?

Risk mitigation in DeFi involves managing capital allocation, choosing the right tools, and paying attention to operational details.

Step 1: Fund allocation and position sizing. Only use amounts you can afford to lose; invest incrementally; never put essential living funds into high-volatility strategies.

Step 2: Contract security and audits. Check if the protocol is open-source, has undergone third-party audits, know the team’s background and track record, and favor mainstream transparent projects.

Step 3: Wallet permission management. Review authorization limits before granting access—only approve necessary amounts; regularly use permission revocation tools (like Revoke) to remove unused approvals and reduce theft risk.

Step 4: Price and liquidation risk. Maintain a safety buffer when borrowing; avoid pushing collateral ratios to their limit. Set alerts to top up collateral or reduce leverage during sharp market declines.

Step 5: Bridge and network selection. Prefer official or leading cross-chain bridges; test with small amounts first. Confirm gas fees and token formats on the destination network; avoid fake addresses or counterfeit tokens.

Step 6: Stablecoin choice. Favor stablecoins with strong liquidity and regulatory compliance; diversify holdings; understand their redemption mechanisms and historical risk events.

Step 7: Use exchanges as an auxiliary tool. When withdrawing major tokens from Gate to an on-chain wallet, double-check chain type and address. For complex strategies, start with Gate’s low-risk products (such as Earn) to experience returns before moving on-chain.

What Are the Latest Trends or Data Points in DeFi?

Recent trends focus on TVL, DEX trading volumes, stablecoin supply, and yield changes over the past year.

TVL (Total Value Locked): Indicates overall capital scale and market confidence. According to public data from DefiLlama, DeFi TVL in 2025 has shown a rebound, surpassing $100 billion at times, with Ethereum and its Layer 2 networks being major contributors. Key metrics include total TVL, TVL by blockchain, and TVL by protocol.

DEX trading volume: Measures trading activity and liquidity. Throughout 2025, monthly DEX volumes have ranged from tens to hundreds of billions of dollars (sources: Kaiko and DefiLlama DEX Metrics), with significant spikes during volatile markets. Comparing this with centralized exchange spot volume helps assess user preference for on-chain activity.

Stablecoin supply: Reflects demand for on-chain settlement and hedging. In 2025, combined USDT and USDC supply has remained high or continued to grow month-to-month (sources: CoinGecko, official dashboards). Net increases or decreases often correlate with market risk appetite.

Yield rates & costs: Mainstream lending protocols typically offer stablecoin APYs between 1%–5%, while strategy-based yields may spike during volatility but are not sustainable long-term. At the same time, Layer 2 solutions have lowered gas fees and increased throughput, reducing frequent transaction costs. It's recommended to check platforms like DefiLlama, Dune, or protocol dashboards periodically for up-to-date figures by “year,” “past year,” or “Q3 2025.”

How Does DeFi Differ from Centralized Finance (CeFi)?

The main differences lie in custody, transparency, accessibility, and risk boundaries.

Custody: In DeFi you have self-custody—you hold your private keys and control your funds directly. In CeFi, platforms hold your assets for you—they offer account recovery and customer support but require trust in their operational stability.

Transparency: DeFi rules and transactions are fully verifiable on-chain; CeFi relies more on disclosures and audits—full details may not be public.

Access & experience: DeFi is globally accessible 24/7; CeFi offers a more all-in-one service with fiat ramps, mature KYC procedures, and advanced risk controls—better suited for regulatory compliance needs.

Risks: DeFi is prone to contract bugs, oracle issues, and user errors; CeFi carries platform risks such as withdrawal limits or counterparty failure. Many users choose a hybrid approach: buying crypto via CeFi then transferring it on-chain for DeFi strategies—combining fiat services with decentralized flexibility.

Key Terms

• Smart Contract: Program code that executes automatically on a blockchain, enabling transactions without intermediaries.
• Liquidity Pool: A contract pool where users deposit assets in DeFi protocols to provide liquidity for trading.
• Gas Fees: Transaction fees paid to execute operations or contracts on a blockchain network.
• Staking: The act of locking up crypto assets to earn rewards or participate in network governance.
• Flash Loan: An uncollateralized loan in DeFi that must be repaid within a single block.
• Governance Token: A token granting holders voting rights in DeFi protocol decision-making.

FAQ

I want to try DeFi but do not know where to start. What should I learn first?

Start by understanding wallets and basic transactions. Purchase crypto assets through platforms like Gate, then learn how to use a self-custodial wallet (such as MetaMask). Try simple DeFi actions like liquidity mining or lending with small amounts first—the hands-on approach helps you learn faster than theory alone while minimizing risks from mistakes.

What is a flash loan in DeFi? Why is it unique?

A flash loan is an uncollateralized loan that must be borrowed and repaid within a single transaction. It removes the need for collateral required in traditional finance but must be fully repaid instantly—or the transaction fails. This innovation enables cost-free arbitrage for traders but can also be exploited by hackers. Use caution when engaging with or building around flash loans.

Why do some people make money in DeFi while others lose heavily?

Profitability varies due to differences in risk awareness and operational skills. Some users achieve steady returns by choosing low-risk pools and diversifying investments; others are lured by high yields into scams or vulnerable smart contracts. Market volatility, slippage, and misunderstandings of protocols are also common reasons for losses.

Can a DeFi protocol suddenly disappear or "rug pull"? How can I protect myself?

Rug pulls are a real risk—especially with new or lesser-known projects. To mitigate this risk: only invest in audited reputable protocols; check if smart contracts are open source; research team backgrounds; avoid concentrating all funds in one project. Using DeFi products offered by established platforms like Gate reduces risk due to additional oversight.

Why are DeFi gas fees sometimes extremely high?

High gas fees result from network congestion when many users compete for limited block space—driving up prices through bidding wars. On Ethereum mainnet during peak periods, fees can reach hundreds of dollars per transaction; Layer 2 solutions like Arbitrum or Optimism offer much lower costs. Transacting during off-peak times or using low-fee blockchains can significantly reduce your expenses.