DeFi (Decentralized Finance)

What DeFi actually is

DeFi — short for Decentralised Finance — refers to financial applications that run directly on public blockchains and are governed by programmable contracts (smart contracts). The core idea: functions such as exchange, lending, borrowing, savings and insurance are settled directly between users, without the classic intermediaries — banks, brokers, clearing houses.

Most of today's DeFi ecosystem sits on Ethereum and ETH-compatible Layer-2 networks like Arbitrum, Optimism and Base. Solana and a handful of other chains host their own growing DeFi stacks.

Categories of application

The DeFi landscape breaks down into several functional groups:

• DEXs (decentralised exchanges): platforms such as Uniswap or Curve, where tokens are swapped directly from a personal wallet — not via an order book, but through automated market makers.
• Lending protocols: Aave, Compound, Morpho — users deposit crypto assets to earn interest or post them as collateral to borrow against.
• Stablecoin protocols: MakerDAO/Sky (DAI/USDS), Liquity — over-collateralised stablecoins issued via smart contracts.
• Yield aggregators: Yearn, Convex — automatically route capital between protocols to optimise returns.
• Derivatives: dYdX, GMX, Hyperliquid — perpetual futures and options traded on-chain.

A defining trait: every application is non-custodial. The user retains control of private keys and funds at all times — and shoulders the full responsibility that comes with that.

A practical example

An investor holds 5,000 USDC in a MetaMask wallet. He connects it to Aave (version 3, on Arbitrum), deposits the 5,000 USDC into the lending protocol and receives aUSDC in return — an interest-bearing claim on his share of the pool. Yields typically range from 2% to 6% per year, depending on market demand.

The investor can simultaneously borrow against that deposit — drawing, say, ETH up to a protocol-specific loan-to-value limit — and build a leveraged ETH position without having to sell the USDC.

Related concepts

Anyone moving through DeFi will quickly meet terms like smart contract, wallet, non-custodial, Layer 2, AMM, liquidity pool, impermanent loss, slippage, yield farming, total value locked (TVL), and the regulatory framework MiCA.

Questions that come up in practice

Are DeFi earnings taxable in Austria? Yes. Income from lending, yield farming and stablecoin yields is treated like staking income and taxed at 27.5% capital gains tax (KESt). Because no domestic custodian is in the loop, there is no automatic withholding — the investor has to self-declare.

Does MiCA cover DeFi as well? Under the current reading, fully decentralised protocols sit outside MiCA's scope. But once an operationally responsible provider can be identified — a central team or a dominant token holder, for instance — the regulation can apply.