DeFi for RIAs: an advisor’s guide to the asset, protocol, and chain

What DeFi actually is

Decentralized finance is lending, borrowing, trading, and asset management performed by software deployed to a blockchain. A lending protocol can match suppliers of capital with overcollateralized borrowers without a bank operating the ledger. The rules are visible in code and transactions settle on-chain.

That description does not make the arrangement safe, decentralized in every respect, or appropriate for a client. It only identifies the mechanism. A USDC lending position, for example, combines an issuer-controlled dollar token, an upgradeable lending protocol, an oracle, and a settlement chain. Each dependency can fail differently.

The three-layer test

Evaluate every position at three layers:

1. Asset: What does the client legally and economically own? Who can freeze, redeem, dilute, or change it?
2. Protocol: What contracts hold the asset? Who can upgrade or pause them? Which oracles, bridges, curators, and governance processes matter?
3. Chain: Who orders transactions? Can the chain halt? Who controls upgrades and bridges?

Where the yield comes from

Yield is compensation paid by someone or created by some mechanism. Lending yield comes from borrowers. Staking yield comes from protocol issuance and transaction fees. Tokenized Treasury yield comes from the underlying government securities, less fees. Private-credit yield compensates the lender for borrower and recovery risk. Reward-token yield is often a temporary subsidy.

Classifying the source matters more than comparing the percentage. Two positions displaying 5% may contain entirely different duration, liquidity, credit, smart-contract, and control risks.

What belongs in the file

A defensible process records the instrument, dependencies, thesis, disqualifiers, position limit, evidence, reviewer, review date, and observable events that revoke the decision. Rejections deserve the same documentation as approvals. They show that the universe was examined rather than merely ranked.

Continue with the DeFi due-diligence checklist or compare DeFi and tokenized securities.