What is DeFi and how does it work?

If you have ever wondered why finance feels stuck in the past while the rest of the world zooms forward, you are not alone. Decentralized Finance (DeFi) is one of the biggest experiments in moving money out of gated systems and into open, programmable networks.

 

Instead of relying on banks and brokerages, DeFi uses public blockchains and smart contracts to let anyone lend, borrow, trade, or earn without asking for permission.

 

It strips out the middle layers and replaces them with code. No office hours. No permission slips. Just systems that run as designed, in the open, all the time.

 

But what exactly is DeFi, and how does it work?

 

What is DeFi?

In traditional finance, access to credit or better returns often depends on where you live or how much you already have. DeFi flips that model by using blockchains and smart contracts to automate financial services without gatekeepers.

 

Instead of trusting a bank’s ledger and layers of oversight, DeFi relies on cryptographic proof and code that executes as written.

 

Based on CoinGecko’s 2025 Annual Crypto Industry Report, even after the market correction in late 2025, when total market value cooled to around $3 trillion, usage kept growing. Stablecoins, the cash layer of this system, expanded by nearly 50% year-over-year, reaching about $311 billion by the end of 2025.

 

That growth points to a simple shift: people are not just trading anymore. They are using blockchain rails to move money and manage treasury operations in real time.

 

At its core, DeFi means financial services built on decentralized networks rather than centralized intermediaries. Think of it as financial plumbing written in code instead of hidden behind corporate doors. That plumbing runs on blockchains, primarily Ethereum, but also others like Solana and Avalanche.

 

How does DeFi work?

DeFi is not magic. It is software: open code running on blockchains that enforces rules automatically. The secret sauce is smart contracts.

Smart contracts: The rules you can trust

Smart contracts are self-executing programs that run on a blockchain. Once deployed, they do not need a company or a human to enforce the rules. They are transparent, auditable, and automatic. If conditions are met, say, collateral posted and interest due, the code executes without delay.

 

That is the “decentralized” part of DeFi.

 

Who founded DeFi?

DeFi does not have a single founder. It emerged over time from a few key ideas and projects:

• Nick Szabo laid the groundwork in the 1990s with the concept of smart contracts.

• Bitcoin proved that money could work without intermediaries.

• Ethereum, proposed by Vitalik Buterin, made programmable finance practical by enabling smart contracts at scale.

Modern DeFi took shape around 2017–2020 as developers built lending, trading, and payment protocols on Ethereum. In short, DeFi was not founded, it evolved.

 

What you can do in DeFi

DeFi is more than a buzzword. By late 2025, DeFi had grown into a multi-billion-dollar ecosystem, according to data from DefiLlama.

Here are the core building blocks:

1. Decentralized exchanges (DEXs) These are markets without middlemen. Instead of a central order book, DEXs use liquidity pools and automated market makers (AMMs).

2. Lending and borrowing In DeFi, you lend your crypto to a pool and earn interest. Borrowers post collateral and take out loans. Platforms like Aave and MakerDAO pioneered this model.

3. Yield farming and liquidity mining This is DeFi’s answer to “make money while you sleep.” By providing liquidity or staking tokens, users earn rewards, sometimes in the platform’s native token. The result: measurable incentive alignment between users and protocols.

4. Stablecoins Tokens like USDC and DAI provide price stability. They act as the cash in the DeFi world, moving value without the wild swings of Bitcoin or Ether.

5. Synthetic assets and derivatives Platforms in DeFi can create tokenized versions of stocks, commodities, or indices, letting you trade them on-chain without owning the underlying asset.

 

Advantages of DeFi

• Open access: Anyone with an internet connection can use DeFi without banks or intermediaries.

• Transparency: All transactions and smart contracts are visible on public blockchains.

• Self-custody: Users control their own assets instead of relying on third parties.

• Programmability: DeFi services can be combined, allowing lending, trading, and yield strategies to work together.

• Speed and flexibility: Transactions settle quickly and operate around the clock.

Limitations of DeFi

• Smart contract risk: Bugs or exploits can lead to losses with little recourse.

• Market volatility: Price swings can trigger automatic liquidations.

• User responsibility: Mistakes are usually irreversible, with no customer support to fix them.

• Regulatory uncertainty: Rules and oversight continue to evolve across jurisdictions.

 

How is DeFi better than CeFi?

DeFi is not “better” than CeFi in every situation, but it does beat it in a few ways that matter, especially if you value control and transparency.

First, ownership and access

With DeFi, you control your assets directly. There is no account approval, no minimum balance, and no one who can freeze your funds because a policy changed. If you have an internet connection and a wallet, you are in. CeFi, by design, decides who gets access and on what terms.

Second, transparency

DeFi runs on public blockchains. The rules are written in code, transactions are visible, and balances can be verified in real time. In CeFi, you are trusting internal ledgers and disclosures that you cannot independently check.

Third, fewer middle layers

DeFi removes brokers, clearing houses, and settlement delays. Trades and loans settle automatically through smart contracts. CeFi still relies on multiple intermediaries, which adds cost, delay, and points of failure.

Fourth, programmability

DeFi services can be combined. You can lend, borrow, trade, and earn yield across protocols without asking permission. CeFi products are usually isolated and slower to adapt.

 

That said, CeFi still wins on ease of use, customer support, and regulatory protection. DeFi offers more freedom but it also demands more responsibility.

 

Why DeFi matters

1. Financial access

DeFi lets anyone participate in global financial markets without a bank. In regions with limited banking infrastructure, this can be transformative.

2. Innovation speed

Traditional finance moves slowly. DeFi moves at internet speed, with new products launching monthly.

3. Transparency and ownership

You hold your keys. You control your assets. No custodial middleman to freeze access or change terms overnight.

 

Why everyone is talking about it

Some call DeFi a revolution. Others call it risky. Both are half right.

 

DeFi is reshaping how financial services are built: transparent, open, and composable. But it is still early. The infrastructure is solidifying, risks are being better managed, and real-world use cases are growing.

 

So next time someone asks, what is DeFi? You can skip the buzzwords and say this: DeFi is finance without permission, built on open networks, owned by anyone who uses it, and powered by code you can trust.

 

Why choose Toobit?

At Toobit, we make it easy to see how DeFi works without forcing you to jump through hoops.

 

With DEX+, Toobit’s on-chain trading feature, you can access early-stage, trending, and high-potential on-chain assets directly from your Toobit Spot account. No external wallets. No private keys. No gas fees. Just on-chain trading, simplified.

 

DEX+ removes the usual friction that keeps people on the sidelines. You can trade everything from governance tokens to meme coins using the same interface you already know, while still tapping into on-chain liquidity.

 

Combined with real-time market data and a clean trading experience, Toobit lets both new and experienced traders explore DeFi markets with confidence.

 

Ready to try on-chain trading without the headache? Join Toobit and see how DEX+ brings DeFi within reach.

 

To learn more about DEX+, click the FAQ here.