Spy that thing in rotten tree? You might spy this thing in rotten tree (7)
I believe the answer is:
termite
'might spy this thing in rotten tree' is the definition.
Although both the answer and definition are singular nouns, I cannot see how one could define the other.
'spy that thing in rotten tree?' is the wordplay.
'spy' becomes 'M' ('M' is James Bond's boss).
'that thing' becomes 'it'.
'in' means one lot of letters goes inside another.
'rotten' is an anagram indicator.
'm'+'it'='mit'
'tree' anagrammed gives 'tere'.
'mit' going inside 'tere' is 'TERMITE'.
'you' acts as a link.
Can you help me to learn more?
(Other definitions for termite that I've seen before include "White ant" , "Wood-eating insect" , "Mound builder" , "Nest-building insect" , "Ant-like insect which destroys timber" .)