DeFi (Decentralized Finance)
Definition
A financial system built on blockchain technology that provides traditional financial services — lending, borrowing, trading, insurance — without banks, brokers, or other intermediaries.
Decentralized Finance reimagines financial services using blockchain technology and smart contracts. Instead of trusting banks to hold your deposits and process loans, DeFi protocols use transparent, open-source code to provide the same services. Anyone with an internet connection and a crypto wallet can access DeFi — no credit check, no minimum balance, no geographic restrictions.
Core DeFi services include: lending and borrowing (Aave, Compound — deposit crypto to earn interest or borrow against it), decentralized exchanges (Uniswap, Curve — swap tokens without an intermediary), stablecoins (MakerDAO's DAI — algorithmic and collateralized stablecoins), derivatives (dYdX, Synthetix — options, futures, and synthetic assets), and insurance (Nexus Mutual — smart contract coverage).
DeFi's innovation is composability — protocols can interact with each other like building blocks. You can stake ETH for stETH (Lido), deposit stETH as collateral to borrow USDC (Aave), and provide USDC liquidity on Uniswap, earning yield at every layer. This "money legos" concept enables financial strategies that would be impossible in traditional finance.
The risks include smart contract vulnerabilities, oracle failures, regulatory uncertainty, and the complexity of managing positions across multiple protocols. Major DeFi hacks have resulted in billions in losses. The "not your keys, not your coins" philosophy applies with a twist: even with your own keys, a smart contract bug can drain your funds.
DeFi represents a small fraction of global finance but is growing. Total DeFi TVL peaked at over $180 billion and represents a proving ground for financial innovations that may eventually be adopted by traditional institutions.
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Frequently Asked Questions
Is DeFi safe?
DeFi carries significant risks including smart contract bugs, oracle manipulation, regulatory action, and user error. Major protocols with audited code and years of operation (Aave, Uniswap, MakerDAO) have strong track records, but no protocol is risk-free. Only use DeFi with money you can afford to lose.
How do I get started with DeFi?
Start by getting a self-custodial wallet (MetaMask for Ethereum), buying some ETH for gas fees, and trying a simple swap on a major DEX like Uniswap. Start with small amounts to learn the mechanics. Never invest more than you understand and can afford to lose.