Decentralized Finance (DeFi)
A blockchain-based ecosystem of financial services that operate without banks or brokers.
What is DeFi?
Decentralized finance (DeFi) is an umbrella term for financial services and products built on public blockchains — primarily Ethereum — using smart contracts to replace traditional intermediaries such as banks, brokers, and exchanges. DeFi protocols enable lending and borrowing (Aave, Compound), trading (Uniswap), yield generation (Yearn Finance), stablecoins (MakerDAO), and derivatives — all without requiring users to open accounts or undergo identity verification. Participants interact directly with smart contracts using self-custodied wallets. DeFi is characterized by composability (protocols can be stacked like building blocks), transparency (all transactions are publicly auditable), and censorship resistance (no single entity can prevent access). Risks include smart contract bugs, oracle manipulation, liquidation risk, and extreme volatility.
Example
A user can deposit USDC into the Aave lending protocol and earn interest paid by borrowers, all without a bank. The interest rate is set algorithmically based on supply and demand. The entire process is governed by audited smart contracts, and the user retains custody of their collateral throughout.