DeFi (DeFi)

Traditional finance relies on banks, brokers, and clearinghouses as trusted middlemen. DeFi replaces those middlemen with smart contracts — self-executing programs that live on a blockchain and run exactly as written, without a company behind them. Because the code is public and the blockchain is accessible to anyone with an internet connection, DeFi protocols are often described as permissionless: no account approval or identity verification is required to interact with them.

Two of the most common DeFi building blocks are lending pools and automated market makers (AMMs). In a lending pool, users deposit assets that others can borrow; interest rates adjust algorithmically based on supply and demand rather than a loan officer's decision. An AMM is a type of decentralized exchange where prices are set by a mathematical formula using pooled liquidity rather than a traditional order book of buyers and sellers. Ethereum is currently the dominant platform for DeFi activity; see Ethereum explained and DeFi explained.

Key risks that economists and researchers note include smart contract bugs (code errors can be exploited to drain funds), oracle risk (DeFi contracts often rely on external price feeds that can be manipulated), and the general volatility of the crypto assets used as collateral. DeFi activity can be tracked alongside broader crypto market data.