DeFi (Decentralized Finance) is a blockchain-based alternative to traditional financial services that operates without intermediaries like banks, brokers, or exchanges. DeFi applications use smart contracts on blockchains (primarily Ethereum) to automate financial functions like lending, borrowing, trading, earning interest, and more.

Unlike traditional finance, DeFi is permissionless (anyone can participate), transparent (all transactions on-chain), and composable (protocols can be combined like "money legos"). The total value locked in DeFi protocols has grown from near-zero in 2019 to over $50 billion in 2026.

Key Characteristics of DeFi

  • No Intermediaries: Peer-to-peer financial services via smart contracts
  • Permissionless: Anyone with internet can access, no credit checks or approvals
  • Transparent: All transactions visible on blockchain explorers
  • 24/7 Markets: Never closes, unlike traditional banks or stock markets
  • Composability: Combine multiple DeFi protocols for complex strategies

Real-World Example

Using Aave (a DeFi protocol), you can deposit USDC stablecoins and earn 5% annual interest—paid directly by smart contracts, not a bank. You can also borrow against your crypto collateral without selling it, all without filling out loan applications.

Understanding DeFi is easier when you're familiar with these related concepts:

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