Decentralized Finance (DeFi)

DeFi applications use smart contracts, self-executing programs on blockchains such as Ethereum, to carry out financial transactions automatically according to pre-set rules. Users interact with them directly using crypto wallets.

Common DeFi services include decentralized exchanges, where users trade tokens with each other through automated pools of funds; lending platforms, where users deposit crypto to earn interest or borrow against collateral; and stablecoins and derivatives.

For example, a user could deposit cryptocurrency into a DeFi lending protocol as collateral and borrow a stablecoin against it, without any credit check, with the loan automatically liquidated if the collateral's value falls too far.

Supporters see DeFi as more open, transparent and accessible than traditional finance. But it carries serious risks: bugs in smart contracts, hacks, extreme price volatility, fraud, lack of consumer protection and unclear regulation. Billions of dollars have been lost through exploits. Despite the name, many DeFi projects remain controlled by small groups of developers or token holders.