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.

DeFi: Frequently Asked Questions

What kinds of services does DeFi offer?

DeFi covers financial services such as lending, borrowing, trading, saving, and derivatives, all built on blockchains and run by smart contracts rather than banks or brokers. A lending protocol, for example, lets depositors supply assets to a shared pool while borrowers draw against collateral, with interest rates set automatically by supply and demand.

What does "composable" or "money legos" mean in DeFi?

Because each DeFi service is a set of public smart contracts, anyone can build new products on top of existing ones. Protocols snap together like building blocks, so one application can use another's lending pool or exchange directly. This open composability is why DeFi products are often described as "money legos," enabling fast, permissionless innovation.

What are the main risks of using DeFi?

The same openness that makes DeFi powerful also brings risk. Smart contracts can contain bugs that get exploited, collateral can be highly volatile, and there is no customer-service desk or deposit insurance when something goes wrong. Transactions are typically irreversible, so mistakes and exploits can mean permanent loss. Users carry far more personal responsibility than with a bank.

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