DeFi (Decentralized Finance)
Financial applications (lending, trading, derivatives) built on blockchains using smart contracts — no banks or brokers. DeFi protocols like Uniswap (trading), Aave (lending), and MakerDAO (stablecoins) run trustlessly. Anyone with a wallet can use them. Risky, experimental, but innovative.
- Trustless lending/borrowing.
- Trading tokens without a centralized exchange.
- Earning yield on crypto.
- When you need consumer protection/regulation.
- Large sums you can't afford to lose.
- When UX simplicity matters.
Definition
DeFi is financial software on blockchains — smart contracts for lending, borrowing, trading, derivatives, and insurance without intermediaries. Protocols: Uniswap (DEX), Aave (lending), Curve (stablecoins), MakerDAO (DAI stablecoin). Composability ('money legos') lets protocols combine. TVL measures total value locked.
Why it exists
Traditional finance is slow, exclusive, and intermediated. DeFi lets anyone access financial services trustlessly, 24/7, with just a wallet — no bank account, no approval.
How it works
Users deposit assets into smart contracts. Lending: deposit collateral, borrow against it. DEXs: swap tokens via liquidity pools (AMM). Yield farming: earn rewards for providing liquidity. All on-chain, transparent, governed by token holders. Oracles (Chainlink) feed prices.
Scaling limits
Smart contract risk (bugs, hacks). Oracle manipulation. Impermanent loss for LPs. High gas on Ethereum L1 (L2s help). Regulatory uncertainty. User experience is complex.
Cost shape
Gas fees per transaction. Slippage on large trades. Protocol fees. Risk of total loss from hacks.
Alternatives
- CeFi (centralized exchanges, banks) — Easier, regulated, but custodial and intermediated.
- Traditional finance — Regulated, safe, but slow and exclusive.
Failure modes
- Smart contract hacks (funds drained).
- Oracle manipulation.
- Liquidation cascades.
- Regulatory crackdowns.
- Bridge hacks.