Decentralised finance is financial infrastructure written as smart contracts on a public blockchain. Anyone can interact with it directly from a wallet, the code is visible, and there is no account to open and no institution deciding who may participate. The three primitives are exchange, lending and derivatives, and nearly everything else is a composition of them.
Exchange is handled by automated market makers. Liquidity providers deposit a pair of assets into a pool; a formula prices trades from the ratio of the two; providers earn fees and bear divergence loss when the assets move apart. Lending is overcollateralised: a borrower deposits assets worth more than the loan, interest rates float with utilisation, and if the collateral falls below a threshold, anyone may repay the debt and take the collateral at a discount. Liquidation is performed by third-party bots competing for that discount, which is what keeps the system solvent without a credit department.
Overcollateralisation is the design's central compromise. Without identity or enforcement there is no way to lend against a promise, so DeFi lends only against assets already held. This makes the system robust and limits it: it serves leverage and liquidity management well and does almost nothing for credit in the ordinary sense.
Composability is the property that makes the sector distinctive. Because every contract is public and callable, a deposit receipt from one protocol becomes collateral in a second and is wrapped by a third into a structured product. Positions can be built in a single transaction that no institution would arrange. The same property means an exploit or a bad price in one component propagates instantly through everything built on it, and the dependency is often invisible to the person holding the end position.
The risks are specific and mostly not market risks. Contract bugs are the largest category, and audits reduce but do not eliminate them. Oracle manipulation is the second: lending protocols need a price, and a price sourced from a market shallow enough to move cheaply has been used repeatedly to borrow against worthless collateral. Governance capture is a third — a token-voted protocol with concentrated holdings can have its parameters changed by whoever holds enough. Sequencing risk is a fourth: transactions are visible before they execute, and bots reorder blocks to extract value from them.
Yield deserves a plain sentence. Sustainable yield comes from fees paid by users or interest paid by borrowers. Everything above that is subsidy — tokens issued to attract capital — and it stops when the issuance does. A rate far above what the underlying activity can generate is either paid in newly printed tokens or is compensation for a risk that has not been named yet, and the honest question is always which.