What is DeFi?
Decentralised finance: lending, exchanging and earning through smart contracts instead of banks.
DeFi (decentralised finance) is the name for financial services built from smart contracts on public blockchains. Instead of a bank or broker, the rules are enforced by code that anyone can use and inspect.
What DeFi does
- Exchanging tokens on decentralised exchanges (DEXs) — see DEXs and liquidity pools.
- Lending and borrowing — users deposit assets to earn interest, and others borrow them against collateral.
- Stablecoins created by smart contracts.
- Derivatives, insurance and many other experiments.
How you use it
DeFi applications are used with a self-custody wallet. You connect the wallet to the application and approve each transaction. You keep control of your assets until you send them to a contract.
Collateral and liquidation
DeFi loans are usually over-collateralised: to borrow 100 USDT you may have to deposit crypto worth much more. If the collateral's value falls below a threshold, the protocol sells it automatically (liquidation).
Governance tokens
Many protocols have tokens that let holders vote on changes (for example, UNI for Uniswap).
Oracles
Smart contracts need prices from outside the blockchain. Oracles, such as Chainlink, provide this data.
Composability
DeFi applications can use each other like building blocks: a token received from a DEX can be deposited into a lending protocol, and the loan can be used in another application — all in a few transactions. This "composability" makes new products possible quickly, but it also means that a failure in one protocol can spread to others that depend on it.
Before you use DeFi
DeFi is open and powerful, but there is no customer support and mistakes are permanent. Read DeFi risks.
University materials are for education only and are not investment, legal or tax advice.