Definition
Decentralized finance (DeFi) comprises financial applications that use blockchain-based smart contracts to coordinate activities such as lending, trading and asset management. Its distinguishing feature is that published software rules can perform functions otherwise handled by a financial intermediary.
How It Works
Users typically connect a wallet and authorize transactions that interact with a protocol. For example, a lending pool combines deposits from suppliers and lets borrowers access those assets under collateral rules. Different applications can connect to one another, allowing a token received from one service to be used in another.
Key Considerations
Decentralization varies: administrators, websites, price feeds and governance holders may retain substantial control. A visible transaction history does not prove a protocol is safe or solvent. Contract flaws, collateral losses and dependence on external services can cause losses, while network fees and withdrawal conditions affect usability.