What Is DeFi? A Guide for Australians

We checked the source guidance used here on 12 November 2026.

01How DeFi works

Ethereum.org says a smart contract replaces the financial institution in a DeFi transaction. In its explanation, the contract is a type of Ethereum account that can hold funds and send or refund them when specified conditions are met.

The conditions are written in code. Ethereum.org says smart contracts execute according to those conditions, producing the same result in the same circumstances. Its explanation also describes public blockchain records that let people track transfers and related information.

Your wallet is the tool you use to interact with an account. Ethereum.org says it lets you connect to applications, check your balance, send transactions and verify your identity. Read about hot and cold wallets for more on wallet types.

Being able to inspect a contract does not mean you understand the transaction you are approving. Ethereum.org describes blind signing as approving a smart contract interaction without understanding what it will do. The raw transaction data can be difficult to read.

02What people do with DeFi

Ethereum.org says borrowing can happen directly between a borrower and a specific lender. It also describes pool borrowing, where lenders supply assets to a pool that borrowers can use. These are different arrangements under the same broad label.

Swapping is another activity. Ethereum.org says decentralised exchanges let people trade different tokens. That describes the transaction mechanism, without establishing the safety or tax treatment of a particular trade.

The ATO describes a liquidity pool as crypto assets gathered and locked in a smart contract to support decentralised lending and trading liquidity. A liquidity provider contributes assets and receives new assets or rights representing a share of the pool. Providers receive a share of transaction fees generated by the pools they support.

Wrapping changes the asset you hold. The ATO says a wrapped token is tied to another crypto asset's value and can typically be unwrapped for an equivalent amount of the original asset. Under the smart contract arrangement it describes, the original is locked at the contract address and a wrapped version is created for use in DeFi or trading.

A stablecoin is a different label. Moneysmart describes it as a marketing term for crypto that aims to maintain a stable value relative to a specified asset or basket of assets. That aim does not describe what happens to beneficial ownership when you put it into a DeFi arrangement.

03DeFi words that do not mean what they seem

A screen may call a transfer a loan. The ATO says DeFi's use of familiar terms, including lending and borrowing, does not always match their common meaning, including for tax purposes. The word interest needs the same care.

Many arrangements described as lending or borrowing result in a CGT event, according to the ATO, because beneficial ownership of the crypto asset ends. An arrangement may exchange your asset for another asset or for a right to receive an equivalent number of the same asset later.

Receiving a right to future assets is part of the ATO's explanation. It is a reason to examine what you receive when you transfer the original holding, rather than rely on the label shown in an app. The ATO says both the protocol's terms and its actual operation need analysis.

The ATO also says the income tax rules for securities lending do not apply to crypto asset lending. See our staking guide for information on staking.

04How the ATO taxes DeFi

The ATO's guidance distinguishes transfers into an arrangement from rewards received through it. A CGT event and assessable reward income address different parts of your activity. Our Australian crypto tax guide covers the wider subject.

For lending and borrowing arrangements that trigger a CGT event, the ATO says capital proceeds equal the market value of the property received in exchange. That property may be another crypto asset or a right. The description of the transfer as lending does not settle the calculation.

Liquidity pool deposits and withdrawals

The ATO says depositing crypto assets into a liquidity pool triggers a CGT event. The capital proceeds are the market value of the property received for the deposit, which may be an asset or a right representing your pool share.

Withdrawal has its own event. The ATO says a CGT event happens to the asset or right received on the original deposit when you withdraw from the pool. Its capital proceeds equal the market value of the assets withdrawn.

Periodic rewards

If you receive periodic crypto asset rewards from a DeFi platform, the ATO says you must report their market value at receipt as assessable income in your tax return. Receipt is the point specified in that guidance. Waiting to turn a reward into cash is not the test it sets out.

Wrapping and records

For wrapping through a smart contract, the ATO says CGT event C2 happens when you send the original asset to the contract address, because you no longer control it through your private key. Capital proceeds are the market value of the wrapped asset received. The wrapped asset's initial cost base is the original asset's market value at transfer.

The ATO also says unwrapping through a smart contract triggers C2. The event occurs when the wrapped asset is burnt under the contract.

Records need to cover each asset and transaction. The ATO says crypto assets are separate CGT assets and values must be converted into Australian dollars for the calculation. See ATO record keeping for more detail. A pool deposit and withdrawal, and each reward receipt, need records that support their respective treatment.

05Where Australian law fits

ASIC's INFO 225 says offshore or decentralised structures do not remove key Australian legal obligations. Australian laws apply where digital assets are promoted or sold, or related services are provided, in Australia, including from offshore.

Its DeFi qualification is explicit. INFO 225 does not comment on when a participant in a DeFi arrangement may need a licence, or what counts as true DeFi. ASIC says licensing depends on the individual arrangement's facts and the person's role, offering or ongoing participation.

That leaves no blanket licensing conclusion for every app carrying the label. ASIC also says consumers receive protection under the financial services laws it administers only to the extent the assets and services fall under those laws. Read more about crypto's legal position in Australia.

06Risks and DeFi scams

Moneysmart says most crypto are high risk investments, with values that can move sharply over short periods. Many providers are unlicensed, so you may not be protected if a platform fails or is hacked. Losing your private key usually means losing the crypto.

Scam risks extend to the interface. Moneysmart describes fake trading platforms and wallet sites. It also describes fake trading apps built to steal your money. A fake platform may display growing balances or rewards before locking you out and disappearing with your funds.

An unfamiliar token in your wallet can also be a trap. Moneysmart describes mystery tokens that activate a malicious smart contract when sold. It also warns about impersonation used to obtain personal information and login details.

Scamwatch says scammers fake investment growth data and may allow small withdrawals to build trust before refusing access to the full balance. Pressure to act quickly and promises of large payouts with little risk are further warning signs. Our scams guide covers related patterns.

Moneysmart says to stop sending money if you suspect a scam. Scamwatch says to contact your bank or card provider immediately and ask them to stop transactions. It also says to report the scam to Scamwatch.

07Questions to ask before you use a DeFi app

• ✓What does the contract do with the assets I transfer?
• ✓Do I retain beneficial ownership, or receive another asset or a right?
• ✓Can I understand the transaction I am being asked to sign?
• ✓What records support each transfer and reward receipt?

Frequently asked questions