What Is DeFi (Decentralized Finance)? How It Works, How to Get Started, and Risks Explained for Beginners [2026 Guide]

DeFi stands for "Decentralized Finance" — an umbrella term for financial services built on blockchain technology. Unlike traditional finance that relies on intermediaries such as banks and securities firms, DeFi enables users to transact directly with each other through smart contracts (self-executing programs). As of March 2026, the total value locked (TVL) across DeFi markets exceeds approximately $100 billion, making it one of the fastest-growing sectors in the crypto industry. This article explains everything from how DeFi works to major services, how to get started, and risks with countermeasures — all in a beginner-friendly way.

What you'll learn in this article

• The definition and mechanism of DeFi and how it differs from traditional finance (CeFi)
• Features of 5 major service categories: DEX, lending, staking, and more
• 5 specific steps to get started with DeFi
• 5 risks inherent in DeFi investing and precautions for safe usage

The core technologies powering DeFi are smart contracts and blockchain. These two technologies enable financial services that eliminate the need for intermediaries like banks.

What Are Smart Contracts?

A smart contract is a self-executing program recorded on the blockchain. When predetermined conditions are met, transactions are automatically processed without human intervention.

For example, a process like "when Person A sends ETH, USDC is automatically sent back" can be executed without a teller or agent. This mechanism enables DeFi services to operate 24/7, 365 days a year.

All smart contract transactions are recorded on the blockchain, making them tamper-resistant and highly transparent. As of 2026, more than 4,000 DeFi protocols have been deployed on the Ethereum blockchain.

Why Ethereum Is the Center of DeFi

The majority of DeFi protocols are built on the Ethereum blockchain. As of March 2026, Ethereum accounts for approximately 55–60% of total DeFi TVL.

There are three main reasons why Ethereum became the center of DeFi:

• Smart contract support: Unlike Bitcoin, Ethereum was designed to execute complex programs
• Developer community scale: It has the world's largest blockchain developer community
• DeFi protocol concentration: Major protocols like Uniswap, Aave, and Compound were first built on Ethereum

However, alternative chains such as Solana (SOL), BNB Chain, and Arbitrum have been gaining traction in recent years, and the multi-chain trend is accelerating. See our guides on various altcoin chains for more details.

Why DeFi Has Grown Rapidly

The DeFi market exploded during the "DeFi Summer" of 2020. TVL was approximately $1 billion at the time but reached about $180 billion by the end of 2021 — a 180x increase in just a year and a half.

TVL temporarily contracted to about $40 billion due to the Terra/LUNA collapse and FTX bankruptcy in 2022, but has been on a recovery trend since 2024, surpassing $100 billion again as of March 2026.

The factors behind DeFi's rise include:

• An alternative for the approximately 1.4 billion people worldwide without bank accounts (World Bank, 2021)
• Lower fees compared to traditional financial institutions
• Automated operations via programs that eliminate human error and arbitrary decisions
• Fraud prevention through blockchain transparency

DeFi and traditional finance (CeFi = Centralized Finance) differ significantly in structure and usage. Let's compare the differences in the table below.

CeFi offers legal protections such as deposit insurance and customer support. On the other hand, DeFi provides lower intermediary costs and access regardless of country or region. Understanding the characteristics of each and using them appropriately based on your goals is important.

DeFi encompasses a variety of services, each serving different purposes. Here are the five major categories.

DEX (Decentralized Exchange)

A DEX (Decentralized Exchange) is a service that allows you to swap crypto assets without a central authority. Notable DEXs include Uniswap, SushiSwap, and PancakeSwap.

As of March 2026, monthly DEX trading volume has reached approximately $150 billion, with DEXs now accounting for 15–20% of all crypto trading. Users simply connect their wallet to swap tokens directly without identity verification.

Lending (Crypto Borrowing and Lending)

Lending services enable borrowing and lending of crypto assets. You can deposit your assets to earn interest or provide collateral to borrow assets. Leading protocols include Aave (TVL ~$14 billion) and Compound (TVL ~$3 billion).

Lending interest rates vary by currency and market conditions, but stablecoin rates typically range from 2–8% annually — orders of magnitude higher than bank savings rates (0.001–0.02% annually).

Staking

Staking involves depositing crypto assets into a network to contribute to blockchain operations and earn rewards. It is widely adopted in blockchains using the PoS (Proof of Stake) consensus mechanism.

Ethereum staking yields approximately 3–5% annually (as of March 2026), and liquid staking protocols like Lido allow participation with small amounts. Liquid staking TVL is approximately $35 billion, representing about 35% of total DeFi TVL — the largest category.

Bridges and Layer 2

Bridges are services that move crypto assets between different blockchains. For example, they are used when transferring assets from Ethereum to Layer 2 networks like Arbitrum or Optimism.

Using Layer 2 significantly reduces gas fees compared to the Ethereum mainnet, making it a recommended option for those wanting to try DeFi with small amounts. Arbitrum's TVL is approximately $18 billion (as of March 2026), the largest among Layer 2 networks.

Yield Farming

Yield farming is a general term for earning returns by depositing crypto assets into DeFi protocols. You deposit pairs of crypto assets (such as ETH and USDC) into a DEX liquidity pool and receive trading fees and governance tokens as rewards.

While high returns are possible, risks such as impermanent loss (discussed below) exist, so it's important to understand the mechanics thoroughly before getting started.

DeFi is attracting worldwide attention because it offers several advantages not found in traditional finance.

1. Low fees — Without intermediaries, costs are lower than bank transfer fees (typically ¥220–880). On Layer 2 networks, a single transaction can be completed for just a few yen to tens of yen.
2. Accessible to anyone — Anyone with internet access can use DeFi from anywhere in the world. With approximately 1.4 billion people worldwide lacking bank accounts, DeFi is gaining attention as a tool for financial inclusion.
3. High transparency — All transactions are recorded and published on the blockchain, making fraud structurally difficult. Protocol code is open source and verifiable by anyone.
4. Potentially high returns — Compared to bank savings rates (0.001–0.02% annually), DeFi lending and staking can offer annual returns of approximately 3–10%.
5. Available 24/7/365 — Unlike bank business hours, you can trade and send funds anytime. International transfers can be completed in minutes to tens of minutes.

While DeFi has great potential, there are risks that must be understood before use. Be aware of the following five risks and proceed cautiously.

Smart Contract Risk

Numerous hacking incidents exploiting bugs and vulnerabilities in code have occurred in the past. The 2022 Ronin Bridge incident resulted in approximately $600 million stolen, and the Wormhole bridge incident about $320 million. Choose audited protocols and start with services that have large TVL and proven track records.

Impermanent Loss

When depositing crypto assets into a DEX liquidity pool, if the price ratio of the two deposited tokens changes, you may incur losses compared to simply holding them. Generally, a 50% price change causes approximately 5.7% impermanent loss, while a 200% price change causes approximately 25.5%. Token pairs with higher price volatility carry greater risk.

Rug Pulls (Exit Scams)

Some new projects collect funds only for developers to abscond with them. Be especially cautious of projects promising "high returns." Investigate the development team, audit status, and community activity beforehand. Our memecoin guide also covers rug pull risks.

Gas Fee Volatility

Ethereum gas fees fluctuate significantly based on network congestion. During peak times, a single transaction can cost several thousand yen or more, making small transactions uneconomical. Using Layer 2 networks like Arbitrum or Optimism can reduce gas fees by 10x to 100x.

Regulatory Risk

Crypto regulations in each country continue to evolve, and DeFi services may face restrictions. In Japan, crypto trading profits are taxed as miscellaneous income (maximum tax rate approximately 55%). The December 2025 tax reform outline indicated a move toward separate taxation, but the implementation timeline remains undecided. Remember that tax returns may be required.

Follow these five steps to get started with DeFi. Even without special knowledge, beginners can start using DeFi by following these instructions.

1. Open an account at a crypto exchange — Open an account at OKJ (OKCoinJapan) or a similar exchange. Prepare identity documents (driver's license or My Number card), and account opening can be completed in as little as the same day to a few days.
2. Purchase ETH (Ethereum) — Most DeFi operates on the Ethereum blockchain. Start by purchasing a small amount (around ¥10,000) of ETH. ETH, one of the leading crypto assets alongside Bitcoin, is available on OKJ.
3. Set up a wallet — Install a crypto wallet like MetaMask. Write down the seed phrase (secret recovery words) displayed during setup on paper, store it in a safe place, and never share it with anyone.
4. Send ETH to your wallet — Transfer the ETH you purchased at the exchange to MetaMask. Always copy and paste the wallet address when sending. If you send to the wrong address, recovering your assets is virtually impossible.
5. Connect to a DeFi service — Visit the official website of Uniswap, Aave, or other services and click "Connect Wallet" to start using DeFi.

⚠️ Warning: Many fake DeFi service websites exist. Always verify the official URL before accessing. Avoid clicking on ad links in search results and follow links from official social media accounts or trusted sources.

Q. Can I start DeFi with a small amount?

Yes, you can start DeFi with a small amount. However, since Ethereum gas fees can range from a few hundred to several thousand yen, very small amounts may result in fees exceeding your transaction value. To reduce gas fees, Layer 2 networks like Arbitrum and Polygon are recommended. On Layer 2, gas fees of just tens of yen per transaction are possible.

Q. Are DeFi profits taxable?

In Japan, DeFi profits are classified as "miscellaneous income" and are taxable. Tax calculations are required for every profit-generating event, including token swaps, interest received, and rewards from liquidity provision. If your annual profit exceeds ¥200,000, a tax return is required, so keep thorough records of your transactions.

Q. How is DeFi different from a crypto exchange?

Crypto exchanges (CeFi) are operated by companies and require KYC (identity verification) for account opening. DeFi, on the other hand, is automated via smart contracts and can be used simply by connecting a wallet. CeFi offers legal protections and customer support, while DeFi provides lower fees and higher transparency.

Q. Is there a risk of DeFi being hacked?

DeFi protocols have suffered numerous hacking incidents in the past. In 2022, DeFi-related hacking losses reached approximately $3.1 billion. However, major protocols like Aave and Uniswap undergo multiple audits, and security continues to improve year over year. We recommend starting with protocols that have large TVL and proven track records.

Q. What is the future outlook for DeFi?

The DeFi market is still developing and has significant growth potential. In 2026, Japan is also discussing legislation to bring crypto assets under the Financial Instruments and Exchange Act, which could accelerate institutional investor participation as regulations mature. However, there is also a risk that stricter regulations could restrict some services, so monitoring developments is important.

To get started with DeFi, you first need to purchase ETH at a domestic exchange. With OKJ (OKCoinJapan), you can receive 1,000 yen worth of Bitcoin for free by opening an account and completing identity verification within one month.

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Key takeaways!

• DeFi is decentralized financial services on blockchain, enabling direct transactions without banks
• Smart contracts enable 24/7 availability, low fees, and high transparency
• DEX, lending, staking, bridges, and yield farming are the five major categories
• Getting started follows 5 steps: open exchange account → buy ETH → set up wallet → send funds → connect to DeFi
• Understanding 5 risks including smart contract risk and impermanent loss, and starting with small amounts is crucial

To learn more about DeFi, check out our guides on DEX (Decentralized Exchange) and staking. We also have guides on related topics like Web3, DAO, and NFT.

Reference sources:

• DeFi Llama — DeFi TVL data
• Financial Services Agency (Japan) — Japanese crypto regulation information
• National Tax Agency (Japan) — Crypto taxation rules