DeFi for Beginners: How It Works and the Risks to Know
DeFi promises "a bank without the bank": swaps, loans and yield from pools straight from your wallet. But when the middleman disappears, so does the protection. We look at how DeFi works, where beginners lose money and how to calculate your risk before your first transaction.
The app sends entry, take-profit and stop-loss for popular cryptocurrencies. Free to download.
Up to date as of October 2026. Crypto rules change (in Kazakhstan and elsewhere): before you act, check the platform's licence in your regulator's register and the current tax rules.
What is DeFi
DeFi stands for decentralised finance: apps where smart contracts on a blockchain do the work instead of a company. There is a short definition in our glossary: DeFi. Here we look at how to use it and what you are risking.
| Crypto exchange (CEX) | DeFi | |
|---|---|---|
| Who holds the money | The exchange | You, in your own wallet |
| Identity check | Yes, KYC | No |
| Stop-loss | Yes, as an order | Usually not — you have to watch it yourself |
| Mistake or hack | You can contact support and the regulator | No support, no regulator |
| Fees | Trading fee | Network fee (gas) + protocol fee |
The main tools
| Tool | How it works | Main risk |
|---|---|---|
| Swapping on a DEX | You swap tokens through a pool, without an exchange | Fake tokens, slippage |
| Liquidity pool | You deposit two tokens and earn a share of the fees | Impermanent loss |
| Lending | You lend coins or borrow against collateral | Collateral gets liquidated if the price falls |
| Liquid staking | You stake a coin and get a receipt token | The receipt token can trade below the coin |
Staking is covered in detail in crypto staking: risks and returns.
Impermanent loss: an example
You put ETH and USDC into a pool in equal parts, $500 each. The price of ETH doubles. The pool automatically sells some ETH as the price rises, and in the end you have about 5.7% less than if you had simply held the same coins in your wallet. If the pool's fees over that period are less than 5.7%, you are worse off than a plain hold. The term is in our glossary: impermanent loss.
The main DeFi risks
- Smart contract hacks. One bug in the code and the pool is drained in minutes. An audit reduces the risk but doesn't remove it.
- Rug pull. The project's creators pull the liquidity and vanish — see rug pull.
- Phishing and malicious approvals. A fake site asks you to "connect your wallet" and sign permission to spend your tokens.
- Cross-chain bridges. Historically some of the most frequently hacked parts of DeFi.
- Stablecoins carry risk too. If the "dollar" in a pool loses its peg, your returns go with it — see what is USDT.
A trade example with the risk worked out
Prices are illustrative. Account size: $2,000, risk: 1%, i.e. $20. You buy a token on a DEX.
| Parameter | Value |
|---|---|
| Entry | $2.00 per token |
| Stop-loss | $1.60 (−20%) — below the latest low |
| Position size | $20 / $0.40 = 50 tokens, i.e. $100 |
| Take-profit | $2.80 (+40%), ratio 1:2 |
| Network fees | Buy + sell, say $3 — counted as part of the risk |
The DeFi catch: most DEXs don't let you place a regular stop-loss order. You will have to execute the stop manually, and in a sharp drop the price can blow straight past your level. That's why positions in DeFi are kept smaller than on an exchange, and network fees are included in the risk. You can check the ratio in the risk/reward calculator.
DeFi and regulation (Kazakhstan example)
DeFi protocols are generally not licensed by a financial regulator — in Kazakhstan, for example, they have no licence from the AFSA or the National Bank — so you get no regulatory protection, no complaints process and no dispute resolution. Your tax obligations still apply. In Kazakhstan, income from selling crypto counts as property income, taxed at 10% personal income tax (15% on the part of annual income above 8,500 MCI). Keep a record of every transaction — more in crypto tax in Kazakhstan. In other countries, check your local tax rules.
Common mistakes
- Finding a protocol through search ads or Telegram — and landing on a cloned site.
- Chasing the highest APY. 100% a year usually means a very risky token.
- Using your main wallet. For experiments, set up a separate wallet with a small amount.
- Not revoking old token approvals.
What you are risking
The entire amount you put into a protocol: a hack, a rug pull or a wrong address can't be undone. Add to that falling token prices, liquidation of collateral when lending, impermanent loss and network fees. DeFi returns are not guaranteed: rates change every day and can drop to zero.
Aspiro Invest — a medium-term portfolio: what to hold, when to review it and where the protective levels are.
- DeFi has no middleman — and so no support and no regulatory protection.
- Risk per trade — 1–2% of your account; on a DEX you usually have to execute the stop yourself.
- A separate wallet for DeFi and regular checks of the approvals you have granted.
FAQ
How is DeFi different from a crypto exchange?
On an exchange the middleman is a company: it holds your money, checks your identity and answers to a regulator. In DeFi there is no middleman — you deal with a smart contract directly from your own wallet. There is less convenience and protection, and more responsibility on you.
Can I get my money back if a protocol is hacked?
Usually not. Sometimes the protocol team or the hacker returns part of the funds, but you can't count on it. There's also no regulator to complain to: DeFi protocols are not licensed (in Kazakhstan, for example, they have no licence at all).
What is an "approval" and why is it dangerous?
It's a permission that lets a smart contract spend your tokens. If you sign an approval on a phishing site, the scammer can drain your tokens later, without any further action from you. Check and revoke old approvals regularly.
How much should I start with in DeFi?
An amount you could afford to lose completely, and only after you've got to grips with your wallet and seed phrase. Factor in network fees as well: on Ethereum they can eat a noticeable chunk of a small amount.
Try Aspiro Trade
Crypto signals with entry, take-profit and stop-loss — straight to your phone. You decide and trade on your own exchange.
Not investment advice. Trading involves risk — always use a stop-loss.