Decentralized Finance (DeFi) is an ecosystem of financial applications built on blockchains, primarily Ethereum. They enable financial operations — loans, exchanges, insurance — without the need for banks or other intermediaries.
How does it work?
DeFi uses smart contracts: programs that execute automatically when certain conditions are met. For example, a loan contract automatically releases funds when the borrower deposits their collateral.
Main components
DEX (Decentralized Exchanges): Platforms like Uniswap that allow swapping tokens directly between users, without a centralized intermediary.
Lending/Borrowing: Protocols like Aave and Compound where you can lend your cryptocurrencies to earn interest, or borrow using your assets as collateral.
Stablecoins: Tokens designed to maintain a stable value (usually $1 USD), like USDC or DAI, that serve as a bridge between the crypto and traditional worlds.
Risks
DeFi is not without risks: smart contract vulnerabilities, impermanent loss in liquidity pools, and the inherent volatility of the crypto market. It is essential to research before participating.