Definition
DeFi replicates traditional financial services—lending, borrowing, trading, insurance, derivatives—using smart contracts instead of banks and brokers. Users maintain custody of their assets and interact directly with protocols. DeFi offers higher yields than traditional finance but carries smart contract risk, impermanent loss, and regulatory uncertainty. Total value locked (TVL) in DeFi has reached over $100 billion.
lightbulb Example
An investor deposits $50K USDC into a DeFi lending protocol earning 8% APY—far above bank savings rates. The protocol automatically matches lenders with borrowers, manages collateral, and handles liquidations, all without a bank.
verified_user Key Points
- Financial services via smart contracts—no banks needed
- Higher yields but higher risks
- Smart contract bugs can cause total loss
- TVL (total value locked) measures DeFi adoption