Everything you want to know about DeFi (but were afraid to ask)!

Would you like a self-custody wallet to explore DeFi with? You can download Exodus here.

Decentralized finance (DeFi), sometimes called open finance or money legos, refers to financial services that use decentralized technologies like blockchain and smart contracts. Some examples of what you can do in DeFi include:

Because DeFi is built on decentralized infrastructure and accessible to anyone with an internet connection, it can give people access to financial tools that could previously only be done through a bank or other financial institution. This is made possible by the use of smart contracts.

With DeFi, you can receive a near-instant loan without needing approval, earn interest on your assets, and complete peer-to-peer trades, all while maintaining custody of your crypto.

As DeFi has brought the power of code to financial services, it has opened the door to new potential: yield farming, arbitrage optimization, automated market makers (AMM), and decentralized organizations (DAOs).

In the rest of this article, we'll break down some of these terms and functions in more depth.

With many DeFi protocols, it would be easy to think that using a protocol means giving it custody of your funds. However, thanks to smart contracts, this isn't necessarily the case.

When you interact with a DeFi smart contract, it doesn't gain access to your funds right away. Instead, you give the smart contract permission to transact with your assets under certain conditions. Only when those conditions are met, the smart contract will execute and take custody of your funds.

However, until the smart contract is executed, the funds will remain in your wallet and under your control.

Because of the access that smart contracts can have to your funds, it's important to always do your research on the protocols you interact with. All smart contracts are open-source; anyone can review and audit precisely what the code is designed to do. That way, you can tell if the protocol is trustworthy or not before entrusting it with access to your funds.

For more information on how to stay safe, read our guide: Safety and security for DeFi and web3.

A DEX (decentralized exchange) is a crypto exchange where the liquidity for the trades is provided by multiple liquidity providers instead of one centralized entity.

Additionally, with DEXes, traders maintain custody of their assets without trusting them to a centralized party to complete their trades.

This is made possible by smart contracts, which allow you to trade directly with another person. The contract's code executes the trade, and the funds transfer only between the contract and the involved traders.

Always do your research before using any crypto protocol or service.

AMM stands for automated market maker. A market maker is an entity that connects buyers and sellers to conduct their trades. Market makers are traditionally run by people and institutions.

An AMM is an automated market maker. It facilitates trading via code without a human intermediary.

AMMs run by the conditions as specified in their smart contracts. When using a DEX, you may want to understand its smart contracts before you lend liquidity to it.

Arbitrage is a trading strategy that comes from traditional finance. When the same asset is listed for different prices in different markets, it's an arbitrage opportunity.

Taking advantage of an arbitrage opportunity can be difficult as the variation is often not very significant, and the discrepancy might not last long. Additionally, you must constantly monitor all assets in all markets to spot an arbitrage opportunity.

Automated algorithms in DeFi can find arbitrage opportunities for you. DeFi protocols are able to keep up with the latest market prices and spot any differences between platforms.

Interested in Arbitrage? Check out Balancer, a DeFi protocol that specializes in arbitrage trading.

DAO stands for decentralized autonomous organization. These are organizations that are run by code instead of people.

With DAOs, there's no need for centralized leadership. Decisions can be made from the bottom up, and the code administers and executes those decisions.

This is especially helpful for setting limitations to when, how, and for what treasury funds are spent, administering votes, and executing contracts.

The structure of a DAO lends itself well to organizing work between freelancers or people who live in different countries.

With DeFi, you cannot only take out a loan but also provide one! The loans are all governed and enforced by code.

Typically, DeFi loans require the borrower to overcollateralize the loan, meaning they deposit crypto worth more than the amount that they're borrowing. If they pay back the loan, they get their crypto back. If not, the protocol liquidates the collateral to pay back the loan.

This means that the borrower doesn't need to go through an approval process to take out a loan, and the lender doesn't need to do anything to ensure the loan is paid back.

While it may not make sense at first to put down collateral greater than the loan amount, if we think in terms of crypto and DeFi, it makes more sense. If you have 1 SOL, but don't want to sell it, you can use it as collateral in exchange for stablecoins. You can then use those stablecoins to earn yield or other returns from DeFi. As soon as you pay the loan back, you'll also get your SOL back.

Lending and borrowing protocols can allow you to get more out of your assets as long as you have a plan to pay back your loan.

Yield farming, also known as liquidity mining, is a term for crypto protocols that lock assets into liquidity pools. A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools facilitate decentralized trading, lending, and more.

A liquidity pool requires the equal value of two different assets, such as $100 of SOL and $100 of USDC.

DEXes and AMMs use liquidity pools to ensure they have liquid assets for trading. In return, they give liquidity providers (LP) IOU tokens (LP tokens) that can be given back to reclaim funds.

In exchange for providing funds, LPs can earn interest fees proportional to their share of the liquidity pool.

Some DeFi protocols can automatically move your crypto from protocol to protocol depending on which one offers the highest interest rate in order to maximize your returns.

You can reclaim your funds at any time by returning your LP tokens.

Before you engage in yield farming, you may want to learn about one of its main risks, impermanent loss.

See the options below to learn how to connect your Exodus wallet to dApps and web3 apps.

The web3 browser in Exodus Mobile is only available if you created your wallet before April 22, 2026.
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To learn how to connect to web3 apps with the web3 browser, visit: Web3 browser in Exodus Mobile.

WalletConnect in Exodus Mobile is only available if you created your wallet before April 22, 2026.

WalletConnect is an open-source tool that connects mobile wallets to web3. To learn more, visit: WalletConnect in Exodus Mobile.

You can use Exodus Web3 Wallet to connect to any web3 app.

Web3 Wallet is a multi-chain browser extension wallet for Chrome and Brave. To learn how to download, install, and use Web3 Wallet, visit: Getting started with Exodus Web3 Wallet.