Decentralized finance, or DeFi, refers to financial applications built on public blockchains that operate without a central intermediary like a bank or broker. Instead of a company holding your funds and approving transactions, smart contracts — self-executing code — handle lending, trading, and other financial functions directly.
The core building blocks
Most DeFi activity falls into a few categories: decentralized exchanges that let users swap tokens directly from their own wallets, lending protocols that let users borrow against crypto collateral or earn yield by supplying it, and stablecoins that provide a dollar-pegged unit of account within these systems.
What makes it different from a bank
In DeFi, users retain custody of their own assets in a self-hosted wallet rather than depositing them with an institution. Transactions and protocol rules are enforced by code visible on-chain, which anyone can audit, rather than by an internal ledger controlled by a company.
The risks worth knowing
Smart contract bugs, oracle failures, and liquidation cascades during volatile markets have all caused real losses in DeFi. Because there is no central operator to reverse a mistaken transaction, users bear more direct responsibility for understanding what they are interacting with.