DeFi and tokenization
What DeFi is: lending and borrowing
4 min
DeFi — decentralised finance — is the effort to rebuild financial services (lending, borrowing, trading, earning interest) as smart contracts on a blockchain, with no bank or broker in the middle. Lending and borrowing is the clearest entry point.
How decentralised lending works
Instead of a bank matching savers and borrowers, a lending protocol is a set of smart contracts holding a shared pool of funds:
- Lenders deposit cryptoassets into the pool and earn interest.
- Borrowers take assets out of the pool and pay interest.
- Interest rates are set automatically by supply and demand, not by an institution.
Overcollateralisation
Because the protocol cannot check your credit or chase you for repayment, a borrower must usually deposit more value than they borrow — for example, lock US$150 of crypto to borrow US$100. If the collateral's value falls too far, the contract liquidates it automatically to protect lenders.
This is why DeFi borrowing is mostly used by people who want liquidity without selling an asset, not by those who lack capital.
The risks are different, not absent
DeFi removes the bank but not the risk — it changes its shape:
- Smart-contract risk: a bug or exploit can drain the entire pool, and it has happened many times.
- Liquidation risk: a sharp price drop can wipe out your collateral fast.
- No safety net: there is usually no deposit insurance and no one to call. If funds are lost, they are typically gone for good.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.