This content is for educational purposes only and is not financial advice. bunq doesn't give trading advice. Always do your own research or consult a qualified financial advisor before making any investment decisions. Cryptocurrency investments come with risks, including the potential loss of the principal invested. Prices can fluctuate significantly. bunq Crypto is powered by our partner Kraken.

DeFi, short for Decentralized Finance, is a system of financial services built directly on the blockchain. No banks, no brokers, no intermediaries. DeFi uses self-executing programs called smart contracts to automate things that traditional finance relies on people and institutions to handle: lending, trading, earning yield, and more. Anyone with an internet connection and a crypto wallet can access it.

How DeFi works

Smart contracts are the engine behind DeFi. They're programs stored on a blockchain that run automatically when specific conditions are met, like releasing funds when a loan is repaid, or executing a trade at a set price. Because they live on the blockchain, they're transparent and not controlled by any single party.

DeFi platforms offer services that look familiar but work very differently from traditional finance:

Lending and borrowing. Lend your crypto to others and earn interest, or borrow against your existing holdings. Rates are set by supply and demand, not a bank.

Decentralized trading. Swap one token for another on a decentralized exchange (DEX), with no central platform processing the trade.

Liquidity pools and yield farming. Add your crypto to shared pools that power trades on a DEX. In return, you earn a share of the trading fees, a practice known as yield farming.

Stablecoins. Crypto assets pegged to traditional currencies like the dollar, designed to hold more stable value within an otherwise volatile market.

Benefits and risks

DeFi's appeal comes from its openness. You don't need a bank account, credit history, or approval from anyone to participate. Transactions are recorded on the blockchain and auditable by anyone. And because there's no intermediary, fees can be lower than in traditional finance.

But DeFi carries significant risks worth understanding before you start:

Smart contract bugs. If there's a flaw in the code, it can be exploited. Unlike a bank, there's no deposit protection or recourse if funds are lost this way.

Impermanent loss. If you provide liquidity to a pool, the relative value of your deposited tokens can shift in a way that leaves you worse off than if you'd simply held them.

Price volatility. Most DeFi tokens are highly volatile. Returns can swing dramatically in short periods.

No regulation. DeFi is largely unregulated, which means there's no consumer protection framework if a platform fails or funds disappear.

If you want to earn returns with more predictable risk, start with bunq's Savings Account before exploring DeFi.

Frequently asked questions

What's the difference between DeFi and regular crypto investing?

Regular crypto investing means buying and holding tokens, like purchasing Bitcoin or Solana in the bunq app. DeFi goes further: you interact with protocols to lend, borrow, trade, or earn yield. It's more active, more complex, and comes with a higher risk profile than simply holding an asset.

Do I need a lot of money to use DeFi?

No minimum is required, but keep transaction fees in mind. On networks with high fees, small transactions can be eaten up quickly. Blockchains like Solana are popular in DeFi partly because they keep fees low, making smaller transactions more practical.

Is DeFi safe?

DeFi is an experimental space. Protocols can have bugs, platforms can be exploited, and token values can drop rapidly. It's a high-risk area, and you should only commit what you can afford to lose entirely. Research any protocol thoroughly before connecting your wallet or depositing funds.