Overview
Decentralized Finance, or DeFi, is an ecosystem of financial applications built on blockchains that recreate traditional financial services without intermediaries. Using smart contracts, DeFi offers lending, borrowing, trading, derivatives, and asset management that anyone can access with a wallet. There is no bank, broker, or custodian in the middle; code enforces the rules.
How It Works
DeFi protocols are smart contracts that hold funds and execute predefined logic. Users interact directly with these contracts, typically through a wallet and a front-end interface. Liquidity is supplied by users who deposit assets into pools and earn fees or rewards, and market prices are set algorithmically, for example by automated market makers. Governance tokens let the community vote on protocol parameters.
Why It Matters
DeFi removes gatekeeping: anyone with an internet connection can lend, borrow, and trade globally, around the clock. It also makes financial logic transparent and auditable because the rules are public code. At the same time, DeFi concentrates risk in smart contract vulnerabilities and economic design flaws, so understanding the mechanisms behind protocols is essential for anyone interacting with them.
Related Concepts
DeFi is the umbrella over concepts like AMMs and Liquidity Pools, metrics like TVL and APY, and risk topics like Impermanent Loss and MEV. It also encompasses yield strategies such as Yield Farming and Liquid Staking.