Understanding DeFi
What is DeFi?
Decentralized finance (DeFi) is a set of financial applications built on public blockchains that remove traditional intermediaries like banks. Users keep custody of their assets and interact with smart contracts to borrow, lend, trade, and earn yield.
1. Introduction to DeFi
DeFi is transparent, permissionless, and programmable. Anyone with internet access can participate, and the rules are enforced by code rather than institutions. This creates open financial markets that operate 24/7 with global reach.
2. Key Features of DeFi
What makes DeFi different from traditional finance:
- Transparency: Transactions and reserves are verifiable on-chain.
- Accessibility: Open to anyone—no branch, no applications, no credit checks.
- Permissionless: Interact directly with smart contracts—no gatekeepers.
- Interoperability: Composable protocols (“money legos”) that integrate and build on each other.
3. DeFi vs. Traditional Finance
In TradFi, institutions custody assets, control access, and price services. DeFi enables peer-to-contract interactions where users custody assets in wallets and transact by signing on-chain actions, typically at lower cost and with faster settlement.
- Intermediaries: Banks/brokers vs. smart contracts.
- Control: Custodian-held vs. self-custody in non-custodial wallets.
- Transparency: Opaque ledgers vs. public blockchains.
4. Benefits & Risks
Benefits: Inclusive access, faster settlement, programmable money flows, and often lower fees.
Risks: Smart contract bugs, oracle/manipulation risks, market volatility, and evolving regulation. Always assess protocol audits, TVL quality, governance, and upgradeability.
What's Next
Next, explore DeFi Platforms and Protocols— from DEXs and lending markets to stablecoins and yield aggregators—and how they work together to power open finance.
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