Glossary

DeFi

Plain-language definition Crypto glossary

Key takeaways

DeFi, or Decentralized Finance, refers to financial services such as lending, borrowing, trading, saving, and derivatives built on blockchains and run by smart contracts instead of banks or brokers.
Each service is a set of public smart contracts that users interact with directly from their own wallets, and because anyone can build on top of them, DeFi products are often called composable money legos.
DeFi makes financial services permissionless, globally accessible, and transparent on-chain, but that same openness brings risks such as smart-contract bugs and volatile collateral.

Definition

Decentralized Finance, or DeFi, refers to financial services — lending, borrowing, trading, saving and derivatives — built on blockchains and run by smart contracts instead of banks or brokers. Users interact directly with the protocols from their own wallets.

How it works

Each service is a set of smart contracts deployed on a smart-contract platform. A lending protocol, for instance, lets depositors supply assets to a shared pool and lets borrowers draw from it against collateral, with interest rates set automatically by supply and demand. Because the contracts are public, anyone can build on top of them, which is why DeFi products are often described as composable “money legos.”

Why it matters

DeFi makes financial services permissionless and globally accessible, and it makes their workings transparent on-chain. The same openness brings risks: smart-contract bugs, volatile collateral, and the absence of a customer-service desk or deposit insurance when something goes wrong.

Example

Swapping tokens on a decentralized exchange or earning yield by supplying assets to a lending market are everyday DeFi activities.

FAQ

Frequently asked questions

How is DeFi different from traditional finance?

Traditional finance routes services through banks and brokers that hold your funds and act as intermediaries, while DeFi runs the same kinds of services through public smart contracts you interact with directly from your wallet. This makes DeFi permissionless and transparent, but it also removes the intermediaries that would otherwise absorb certain risks.

What does composable or money legos mean in DeFi?

Because DeFi smart contracts are public, anyone can build new products that plug into existing ones, stacking services together like building blocks. This composability is why DeFi protocols are often described as money legos.

Is DeFi risky?

DeFi carries real risks including smart-contract bugs, volatile collateral, and the fact that you are responsible for your own funds with no intermediary to call. Its openness and transparency are strengths, but they do not remove these risks, so this is educational information and not financial advice.