How DeFi works
DeFi, or decentralised finance, replaces banks and brokers with smart contracts running on public blockchains. Lending, borrowing, trading, and yield all happen through code that anyone can audit, and you keep custody of your assets in your own wallet the whole time. There is no account to open and no intermediary to approve you; you connect a wallet and interact with the protocol directly.
Worked example
You supply USDC to a lending protocol and earn a variable yield paid by borrowers. The smart contract holds the collateral, sets the rate from supply and demand, and liquidates under-collateralised borrowers automatically. No bank sits in the middle, but no bank backstops you either: if the contract has a bug, the funds can be lost with no recourse.
DeFi versus regulated trading
DeFi offers self-custody and open access; regulated trading offers recourse, negative balance protection, and a known counterparty. On Volity you trade crypto as spot or CFDs through UBK Markets under CySEC licence 186/12, which is the opposite trade-off to DeFi: less autonomy, more protection. Neither is strictly better; they suit different risk appetites, and many participants use both.
Why it matters
DeFi yields can beat anything in regulated finance, but the risks are different in kind: smart-contract exploits, oracle manipulation, and governance attacks, none of which a deposit insurer covers. Judge a protocol by its audit history and how long it has survived live, not by its advertised APY. Related: stablecoins and staking.
Read the full breakdown in our crypto trading guide.
