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Decentralised Finance (DeFi) is a blockchain-based financial system that allows people to access financial services without relying on traditional intermediaries such as banks, brokers, or other centralised institutions. Instead, DeFi uses smart contracts and blockchain technology to enable activities such as trading, lending, borrowing, earning yield, and staking.
DeFi has become an important part of the crypto ecosystem, offering open and permissionless access to financial applications. Users can interact with DeFi protocols directly through a crypto wallet, although these applications also carry risks such as smart contract vulnerabilities, market volatility, and impermanent loss.
Traditional finance typically relies on banks and financial institutions to facilitate transactions and manage funds. DeFi replaces many of these intermediaries with smart contracts, which are self-executing programmes deployed on a blockchain.
This allows users to access financial services directly through decentralised applications (dApps). Transactions are generally recorded transparently on the blockchain, while users retain control of their assets through their crypto wallets.
DeFi applications operate using smart contracts, which automatically execute predefined rules when certain conditions are met. This removes the need for a central authority to approve or process every transaction.
Decentralised exchanges (DEXs) allow users to trade crypto assets directly from their wallets without depositing funds with a centralised exchange. Platforms typically use liquidity pools, where users provide assets that facilitate trading.
DeFi lending protocols use liquidity pools to connect lenders and borrowers. Users can deposit crypto assets into a pool and potentially earn interest, while borrowers can access funds by providing the required collateral.
The DeFi ecosystem includes several types of protocols and applications:
Together, these applications form a financial ecosystem where users can trade, lend, borrow, stake, and earn yield using blockchain-based protocols rather than traditional financial intermediaries.
DeFi, or Decentralised Finance, refers to financial services built on blockchain networks that allow users to trade, lend, borrow, stake, and earn returns without relying on traditional financial institutions. Instead of banks or brokers, DeFi applications use smart contracts to automate transactions and manage funds.
DeFi uses blockchain technology, smart contracts, and decentralised applications (dApps) to provide financial services. Smart contracts automatically execute transactions based on predefined rules, while users interact with protocols directly through their crypto wallets. This allows activities such as lending, borrowing, and trading to take place without a traditional intermediary approving each transaction.
The main difference is who controls and manages the financial service. DeFi operates through decentralised protocols and smart contracts, allowing users to interact directly with blockchain applications. CeFi, or Centralised Finance, relies on companies or institutions such as crypto exchanges and financial platforms to manage accounts, transactions, and user funds. DeFi generally offers greater user control and transparency, while CeFi often provides a more familiar and managed user experience.
A DeFi coin generally refers to a cryptocurrency that operates on its own blockchain, while a DeFi token is typically issued on an existing blockchain such as Ethereum. For example, a blockchain's native asset can be considered a coin, whereas tokens can represent governance rights, utility, rewards, or other functions within a DeFi protocol. In practice, the terms are sometimes used interchangeably, so it is important to check the specific asset and protocol.
