Three parts, and none of them is a company
ethereum.org calls DeFi “an open and global financial system built for the internet age.” Strip the slogan and what’s left is three pieces of software.
The first is a set of smart contracts on a blockchain. They hold the money and run the rules: who may borrow, at what price a swap happens, when a loan gets closed.
The code is public too. In ethereum.org’s words, “Contracts are also public for anyone to inspect and audit.”
The second is your wallet. The contracts never hold your keys. You sign a transaction, your wallet sends it, and the contract does what its code says with what you sent.
The third is the website, called the front end. It builds the transaction for you and shows you balances and prices.
Nobody at a desk approves any of this. ethereum.org’s comparison table sets “DeFi is open to anyone” against “You must apply to use financial services.” The same table gives the other half: in DeFi “You hold your money,” so if you lose it, nobody can give it back.
You deal with a pool, never with a person
The old description of DeFi was peer to peer, one person lending to another. That’s wrong for almost everything you’ll use.
When you lend on a protocol such as Aave or Compound, you put tokens into a shared pool, and borrowers draw from the pool. ethereum.org describes the model as “Pool-based where lenders provide funds (liquidity) to a pool that borrowers can borrow from.” No borrower knows you exist, and your money is lent under the pool’s rules, not to a named person.
Swaps work the same way. On a decentralized exchange built as an automated market maker, you trade against a pool of two tokens that other people deposited.
There’s no buyer waiting on the other side, only a formula that sets the price from what’s in the pool. Lesson 2 works a swap through, number by number.
Four parties who can still change things
DeFi’s pitch is that no one is in charge. In practice, four parties hold some of the controls.
Smart contracts are “immutable by design,” as ethereum.org puts it, but many protocols keep an upgrade key through a proxy, a front contract that points at the logic contract, and “Performing the upgrade is then a matter of changing the address of the logic contract referenced in the proxy contract.”
ethereum.org states the consequence: “An entity with access to upgrade functions can change the entire contract.” The fixes it names are a timelock, a delay between announcing an upgrade and running it, and a group of signers or a governance vote in place of one person’s key. “Timelocks give users some time to exit the system if they disagree with a proposed change.”
Many protocols hand governance decisions to holders of a token. That’s more open than one developer with a key, and it can be attacked, as lesson 6 shows.
Oracles exist because a contract can’t see the outside world. ethereum.org: “Ethereum-based smart contracts cannot, by default, access information stored outside the blockchain network.” Something has to tell a lending contract what ether is worth, and that something is an oracle.
Many DeFi pools hold USDC or USDT, and both tokens have an issuer with a switch.
Circle’s risk disclosures say it “reserves the right to block the transfer of USDC to and from an address on chain in extraordinary circumstances.” Tether’s terms allow it to respond to a suspected prohibited use by “blacklisting any Digital Tokens Address which holds Tether Tokens.” A frozen address can’t move its dollars, whatever the DeFi contract says.
Public and pseudonymous, never anonymous
Nobody asked for your passport, so it’s tempting to think no one knows who you are. ethereum.org’s own word is careful: “Transaction activity is pseudonymous.”
Every swap, deposit and withdrawal you make sits on the chain forever, tied to your address. Anyone who links the address to you, through an exchange you withdrew from, a payment you received or a name you registered, can read your whole history. Some DeFi websites also screen addresses and refuse ones tied to sanctions.
Last checked: 6 November 2026