Defuse means to prevent an explosion by removing the detonating fuse and, by extension, to make something safer; diffuse means to spread over a wide area or across many people. Thus I defused the heated argument, We’ll diffuse this ink in water, The diffused light glows softly, and Our university seeks the diffusion of knowledge to nurture more interesting people.
Although diffuse implies softening when paired with light, it should not be misused in place of defuse to mean the same with any form of tension. Prefer Someone should defuse this argument to Someone should diffuse this argument, the latter of which humorously implies that someone should spread the argument around rather than bring it to a peaceful close.