DeFi

Decentralized Finance, or DeFi, refers to financial services — lending, borrowing, trading, saving and derivatives — built on blockchains and run by smart contracts instead of banks or brokers. Users interact directly with the protocols from their own wallets.

How it works

Each service is a set of smart contracts deployed on a smart-contract platform. A lending protocol, for instance, lets depositors supply assets to a shared pool and lets borrowers draw from it against collateral, with interest rates set automatically by supply and demand. Because the contracts are public, anyone can build on top of them, which is why DeFi products are often described as composable “money legos.”

Why it matters

DeFi makes financial services permissionless and globally accessible, and it makes their workings transparent on-chain. The same openness brings risks: smart-contract bugs, volatile collateral, and the absence of a customer-service desk or deposit insurance when something goes wrong.

Example

Swapping tokens on a decentralized exchange or earning yield by supplying assets to a lending market are everyday DeFi activities.