Decentralized Finance, or DeFi, refers to a financial system built on blockchain technology that operates without traditional intermediaries like banks, brokerages, or exchanges. Instead of relying on central authorities, DeFi uses smart contracts. These are self-executing programs stored on a blockchain that automatically enforce the terms of an agreement when specific conditions are met.
Most DeFi activity occurs on the Ethereum network, though other blockchains like Solana and Avalanche also host these protocols. Users interact with applications called dApps to perform financial tasks. Common activities include lending assets to earn interest, borrowing funds against collateral, or swapping tokens on decentralized exchanges. These platforms often provide transparency by making transaction records public on the blockchain ledger.
Total Value Locked, or TVL, is a primary metric used to measure the size of the DeFi ecosystem. At its peak in late 2021, TVL across all protocols exceeded $175 billion. While DeFi offers accessibility and potential yield, it carries significant risks. Smart contract vulnerabilities, software bugs, and market volatility can lead to the permanent loss of capital. Users must conduct thorough research and understand that trading and participating in DeFi protocols involves substantial financial risk.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.