Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is an umbrella term for financial applications and services built on blockchain technology primarily Ethereum. The core idea behind DeFi is to remove intermediaries like banks brokers and traditional financial institutions from financial transactions and services.
Key Characteristics:
Decentralization: No central authority controls the network or the financial services offered. Instead they run on distributed blockchain networks.
Permissionless: Anyone with an internet connection and a compatible crypto wallet can access and use DeFi applications regardless of their location or financial status.
Transparency: All transactions and operations are recorded on a public blockchain making them auditable and visible to everyone.
Programmability (Smart Contracts): DeFi applications are powered by "smart contracts" – self-executing agreements whose terms are directly written into code. These contracts automate various financial processes.
Interoperability: DeFi protocols and applications are often designed to integrate and work with each other creating a modular and flexible financial ecosystem (often referred to as "money legos").
How DeFi Works:
DeFi utilizes blockchain technology and smart contracts to recreate traditional financial services in a decentralized manner. Here are some common DeFi applications:
Decentralized Exchanges (DEXs): Allow users to trade digital currencies directly with each other without the need for a centralized exchange.
Lending and Borrowing Protocols: Users can lend their crypto assets to earn interest or borrow crypto by providing collateral. Interest rates are often determined by supply and demand within the protocol's smart contracts.
Yield Farming: Users provide liquidity to various DeFi protocols and earn rewards in the form of cryptocurrency.
Stablecoins: Digital currency designed to maintain a stable value often pegged to a fiat currency like the US Dollar to mitigate volatility in the DeFi ecosystem.
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