customers can open a case through etsy up to 100 days from purchase, and up to 180 days through their credit card.
things have to be "fit for purpose", so if they have used it, it does not make it exempt from claiming.
The customer had to contact you through "purchase and reviews", and could only open a case, 48 hours after that, if you failed to come to a resolution with them.
If you don't sort it out with your customer in that time, etsy looks at the case, and decides if the customer is due a refund or not.
If etsy refunds, because they think the customer is due a refund, and you do not qualify for seller protection, etsy recoups from you.
for seller protection, you have to have legal return policies , in your policy section- 14 days, with another 14 to return, a legal gdpr policy, and your address, and e-mail address in sellers details, which you don't have
You didn't know that buyers could dispute transactions?
Yes they can, also depends on which country but doubt Etsy looks at all the countries and just refunds.
Normally though after a certain period you have to repair or replace the faulty product not instantly refund.
For example in the Netherlands
When you buy something, you are entitled to a functioning product. If the product stops functioning within 6 months of the purchase, the law assumes that it was faulty at the time of purchase. This means you will be entitled to a free repair or replacement product unless the seller can prove you did not use the product correctly.
The OP is in the UK, it's 6 months here too, and if they don't repair/replace, the buyer is due a full refund