What is decentralized finance (DeFi)?

Decentralized finance, or DeFi, is a set of financial services built from smart contracts instead of banks or brokers. People use DeFi apps to swap one token for another, lend tokens out for interest, or borrow against tokens they already hold.

On a normal exchange, a company matches buyers and sellers and holds customers' money. On a DeFi exchange, a smart contract holds pools of tokens and sets prices by formula. Anyone with a crypto wallet can use it, at any hour, without opening an account.

That openness cuts both ways. There is usually no customer service, no deposit insurance and no one to reverse a mistake. Loans are typically over-collateralized: to borrow $100 you might lock up $150 in tokens, and if their price falls far enough the contract sells them automatically.

Regulators have noticed that many services described as decentralized are in fact run by an identifiable team. IOSCO, the global body of securities regulators, set out recommendations in 2023 saying that where people or firms control a DeFi service, the same rules on investor protection and market integrity should apply to them as to traditional finance.