What Is DeFi (Decentralized Finance)?
Also known as: Decentralized Finance
In short
DeFi (decentralized finance) is the general name for the ecosystem in which financial services such as lending, borrowing, swapping and earning yield are offered through smart contracts on public blockchains, without banks or brokerages.
DeFi applications are permissionless: anyone with a crypto wallet can use these services without waiting for identity verification or account approval. Transactions and protocol rules are openly visible on the blockchain. The ability of protocols to be built on top of one another, that is, composability, has led to the money legos analogy for DeFi; for example, a liquidity provider token earned on a DEX can be used as collateral in another protocol.
The main DeFi areas include decentralized exchanges such as Uniswap and Curve, lending protocols such as Aave and Compound, decentralized stablecoins such as DAI, derivatives platforms and liquid staking services. The size of the ecosystem is generally measured by total value locked (TVL) in protocols. The growth that accelerated with the yield farming trend in the summer of 2020 is the reason this period was named DeFi Summer.
DeFi's risks are also distinctive: smart contract bugs and hacks, oracle manipulation, impermanent loss faced by liquidity providers, liquidations during sudden price drops and legal uncertainty are chief among them. Because users control their assets, there is also no intermediary to reverse an erroneous transaction.
Last updated: · This content is for information purposes only and is not investment advice.