A button labelled “deposit” does not explain where your money goes or who can return it. In decentralised finance, usually shortened to DeFi, that question deserves particular attention: a convenient interface can connect to contracts, assets and networks with different risks.
What DeFi means
DeFi is a broad term for financial applications built on blockchain networks. Uses include token exchanges and lending. Smart contracts execute programmed rules; this does not make every application a bank or remove every dependency.
Separate four components: the network recording transactions, the token you use, the protocol defining the rules and the website through which you access it. Familiarity with one component does not establish the reliability of the others.
How a collateralised loan works
In many DeFi lending systems, borrowers provide crypto-assets as collateral. A fall in the collateral’s value or an increase in the debt can trigger liquidation under the protocol’s rules. Those conditions need to be understood before use.
As a conceptual example, imagine collateral initially worth more than a loan. A price decline can narrow that margin even if the borrower takes out no additional money. Assessing the arrangement would require knowing the applicable threshold, where the price comes from and the cost of exiting. There is no universal percentage that applies to every protocol.
Why an advertised yield needs context
Before comparing numbers, ask which asset pays the return, where it comes from and whether it includes temporary incentives. Receiving more token units does not establish that you can recover more euros. Keep separate notes for the token balance, its approximate value and withdrawal costs, rather than treating them as an assured return.
The risks behind the interface
Ethereum’s technical documentation describes contract vulnerabilities, administrative risks and manipulation of price sources. An audit can provide information, but it does not prove that an application cannot fail.
An EBA and ESMA assessment also identifies attacks, compromised keys and difficulty understanding products and service chains. The word “decentralised” does not tell you who can change rules or handle a complaint.
A useful record before connecting a wallet
- The protocol name, official website and network being used.
- The asset supplied and the asset you would receive on exit.
- What the requested signature permits: reading, transferring or approving spending.
- Liquidation, lock-up and withdrawal conditions.
- Contract documentation, recent changes and incident support.
If you cannot complete an entry, leave the transaction pending. You do not need to connect a wallet or transfer money to begin reading about a project.
Is DeFi the same as buying cryptocurrency?
No. Buying an asset and subsequently using it in a contract are separate decisions. The second introduces dependencies that need their own assessment. Our explanation of XRP and XRP Ledger explores the distinction between an asset and a network.
Sources checked on 22 September 2026. Educational content, without investment recommendations or promised returns.
