What is DeFi and why should you care?

DeFi explained: how does it work?

Traditional finance runs on institutions. A bank holds your deposit, decides whether to lend it, and keeps the ledger. DeFi replaces the institution with a smart contract: a program on a blockchain that holds assets and executes rules automatically. If the rules say a loan is repaid when collateral is returned, the contract does exactly that, for anyone, at any hour, with no approval step.

Because everything is on a public blockchain, every balance and every transaction is visible. Because the code is open, anyone can build on top of it. Those two properties, transparency and composability, are what make DeFi different from a bank with a website. A bank can tell you it is solvent; a DeFi protocol shows you its reserves in real time. A bank's products are built by the bank; a DeFi protocol's building blocks can be assembled by anyone into something new. The next section takes those blocks one at a time.

What are the building blocks of DeFi?

The building blocks are simple. A liquidity pool is a smart contract holding two or more assets that anyone can trade against; the people who deposit those assets earn a share of trading fees. A decentralized exchange is a set of these pools with an interface on top. A lending protocol is a pool where depositors supply assets and borrowers draw against collateral, with interest rates set by an algorithm that responds to supply and demand.

Stablecoins, tokens pegged to a currency such as the US dollar, are the unit of account that sits underneath most of this activity. Vaults automate combinations of the other blocks so a depositor does not have to manage each step. Oracles feed outside prices into the contracts so that a lending protocol knows when collateral has fallen too far. None of these pieces is complicated on its own. What makes DeFi powerful, and what makes it risky, is that they snap together: a vault can deposit into a lending protocol whose collateral is a liquidity pool token priced by an oracle. Each connection is a feature and a dependency.

What can you do with DeFi?

Lending and borrowing account for a large share of the value in DeFi. You can supply stablecoins or major tokens to a protocol such as Aave and earn a variable interest rate, or post collateral and borrow against it without a credit check. Trading happens on decentralized exchanges such as Uniswap, where you swap one token for another directly from your wallet.

Yield strategies combine these primitives. Providing liquidity earns fees. Lending earns interest. Staking on proof-of-stake networks such as Ethereum and Solana earns protocol rewards for securing the chain. DeFi vaults automate combinations of these so a depositor does not have to manage each step.

Beyond yield, DeFi supports derivatives, insurance-style coverage and on-chain asset management. Not all of these have found durable demand. Lending, trading and stablecoins have. That is where most of the value, and most of the institutional interest, sits today.

What are stablecoins, and why do they matter in DeFi?

A stablecoin is a token designed to hold a fixed value against a currency, most often one US dollar. Stablecoins are the unit of account for most DeFi activity: the asset people lend, the asset people borrow, and one side of most trading pairs. Without them, every DeFi position would carry crypto price volatility on top of whatever the position itself was meant to do. With them, a lender can earn a dollar-denominated rate and a borrower can raise dollars against crypto collateral.

Not all stablecoins hold their peg the same way, and that difference has mattered. Terra's UST was an algorithmic stablecoin supported by a subsidized yield rather than by reserves; it unwound in days in May 2022 and took holders of UST and LUNA with it. Stablecoin legislation passed in the United States in 2025 created a federal framework for payment stablecoins, which reduced one source of regulatory uncertainty. Abra's dollar yield strategy, USDaf, applies lending and related techniques to dollar-denominated tokens, with a return that is variable and not guaranteed; the counterparty and smart contract risks remain even though the price volatility does not.

What are the risks of DeFi?

Smart contract risk is the defining one. If the code has a flaw, an attacker can drain the funds it holds, and there is no customer service line to call. Euler Finance was drained in an exploit in March 2023. Curve Finance pools lost funds in July 2023 through a bug in the compiler used to build them, which affected contracts that had passed audits. Cross-chain bridges have been hit repeatedly, including Wormhole in February 2022 and the Ronin bridge in March 2022.

Impermanent loss affects liquidity providers specifically. When the prices of the two assets in a pool diverge, the pool rebalances against you, and you can end up with less value than if you had simply held the assets. Rug pulls are outright fraud: a team launches a token or protocol, attracts deposits, and withdraws everything. Terra's collapse in May 2022 was not a rug pull, but it showed how an algorithmic stablecoin with a subsidized yield could unwind in days.

Regulatory risk sits over all of it. Rules for DeFi are still forming, and protocols or their front ends can be restricted in particular jurisdictions. The Abra risk guide covers each of these with mitigations.

How does DeFi compare to traditional finance?

DeFi can offer different settlement, access and transparency characteristics than traditional financial arrangements. Transactions settle in minutes rather than days. Anyone with a wallet and an internet connection can participate, with no account application and no business hours. Every position and every reserve is visible on-chain, so you can verify a protocol's solvency yourself instead of trusting a quarterly report.

Traditional financial arrangements may provide protections that are generally absent from direct DeFi participation, such as deposit insurance for eligible bank deposits and established dispute and regulatory processes. Bank deposits carry government insurance up to a limit. Brokerage accounts carry investor protection schemes. If a bank makes an error, there is a dispute process, a regulator and a court. DeFi has none of that by default. A mistaken transaction is final. An exploited protocol may or may not reimburse users, and if it does, that is a choice rather than an obligation.

DeFi can reduce reliance on traditional intermediaries, but direct participation may also lack protections available in regulated financial arrangements. Access through an adviser or other intermediary can add diligence, monitoring and reporting, but does not recreate all traditional protections or eliminate DeFi risks.

Can you access DeFi yield through a regulated platform?

Yes. A registered adviser may select and monitor DeFi strategies on a client's behalf. Abra Capital Management, LP is an SEC-registered investment adviser. Certain eligible undeployed assets may be held with Fireblocks Trust Company, LLC; assets deployed to a DeFi protocol may leave that custody environment and become subject to protocol, smart-contract and counterparty risks. ACM performs diligence and monitoring pursuant to its investment and risk-management processes.

This does not make DeFi risk disappear. A smart contract can still fail. What changes is who is doing the protocol research, how concentrated the exposure is, and what happens to your assets that are not deployed. Abra's USDaf dollar yield strategy draws part of its return from DeFi sources. That return is variable and not guaranteed. The tradeoff is an advisory fee and less direct control in exchange for professional selection and a regulatory wrapper.

For a side-by-side view of doing it yourself, leaving cash in a savings account, or using a curated strategy, see the Abra comparison guide.

Do you need a wallet to use DeFi?

To use DeFi directly, yes. A self-custody wallet such as MetaMask or a hardware wallet holds the keys that sign your transactions with each protocol. The wallet is your identity on-chain and your only means of recovery: if the keys are lost, the assets are lost, and if the keys are stolen, so are the assets. Using DeFi directly also means paying gas for every transaction, reading contract approvals before you sign them, and keeping track of positions across protocols yourself.

If you access DeFi strategies through ACM, you generally do not manage the protocol wallet yourself. Certain eligible undeployed assets may be maintained with a qualified custodian, while deployed assets may be subject to the custody and protocol arrangements required by the strategy. Fireblocks MPC splits key material so that no single party can move funds alone. You give up the ability to touch any protocol you like, and you pay a fee for the structure. In exchange you get consolidated reporting for tax and estate purposes and a fiduciary between your capital and the code. Which route fits depends on how much of the operational work you want to own. If you access DeFi strategies through ACM, you generally do not interact directly with protocol wallets for assets managed in the strategy. Certain eligible undeployed assets may be held with Fireblocks Trust Company, LLC, while deployed assets may be subject to different custody and protocol arrangements. The service includes advisory oversight and consolidated reporting, subject to the applicable advisory, custody and strategy documentation and fees. Which route fits depends on how much of the operational work you want to own.