What DeFi actually is

DeFi is short for decentralised finance. Strip the jargon and most of it is one familiar machine: a lending desk. People deposit an asset into a shared pool. Borrowers take it out, and they must first post collateral worth more than the loan. The interest they pay becomes the depositors' yield. A bank does this with tellers, vaults, and a credit committee. DeFi does it with published software that anyone can read.

Three things about that are genuinely new. The rules are public: the code that moves the money can be inspected by anyone, before committing a dollar. The books are public: every loan and every reserve is visible at any hour, which is more than any bank discloses. And the desk never closes: deposits and withdrawals settle in minutes, on weekends, without asking permission.

Three things are not new at all. Credit risk still exists: if borrowers cannot repay and the collateral falls short, depositors take the loss. Market risk still exists: the assets in the pool move with markets. And people are still in charge: most of these systems have a governing committee of token holders who can change the rules, and the quality of their judgment is a risk in itself.

The largest gap from banking is the safety net. There is no FDIC. No government insures a DeFi deposit, and a mistake, a hack, or a failed borrower is not reimbursed. That is why professional research treats every one of these systems as guilty until proven otherwise, and why position sizes are capped even for the ones that pass.

• What backs the yield on this position, and who owes it to me?
• What happens to my money if the software fails or the borrowers default?
• How much of my portfolio would this ever be, and why that number?