DeFi

DeFi, short for decentralized finance, refers to a set of financial services built on blockchain networks that use smart contracts to automate and enforce agreements, reducing or removing reliance on traditional intermediaries such as banks and brokers. Most DeFi activity is on Ethereum, but other chains such as Solana, Binance Smart Chain, Avalanche, and Tezos are also used.

Key components include decentralized applications (dApps), automated market makers (AMMs), lending and borrowing protocols, stablecoins, synthetic assets, price oracles, and governance tokens. Interactions are typically facilitated through non-custodial wallets, with users maintaining control of their private keys.

Core properties: permissionless access, composability, and transparency. Smart contracts codify rules and settle transactions automatically; the system is often described as "money legos" because diverse protocols can be combined.

Uses and examples: DEXs like Uniswap; lending protocols like Aave; borrowing and margin; stablecoins such as DAI; yield farming and liquidity mining; risk management and insurance protocols.

Risks and challenges: smart contract bugs or exploits; oracle failures; liquidity risk and impermanent loss; market volatility; regulatory uncertainty; potential for scams or rug pulls; operational risk.

History and governance: DeFi emerged from the broader blockchain space, with notable growth around 2019–2020 during the DeFi Summer. Many protocols are governed on-chain by token holders through proposals and voting, enabling protocol upgrades without centralized control.

Measurement and status: total value locked (TVL) is a common metric to gauge activity, though it does not measure risk. The sector remains highly dynamic and subject to regulatory developments and technological changes, such as layer-2 scaling and cross-chain interoperability.