DeFi (Decentralized Finance)

Decentralized Finance (DeFi) is an ecosystem of financial applications built on blockchain networks that replicate and improve upon traditional financial services without centralized intermediaries.

Core DeFi primitives include decentralized exchanges (DEXs) like Uniswap for token trading, lending protocols like Aave and Compound for borrowing and lending, stablecoins like USDC and DAI for price stability, and yield aggregators like Yearn for optimizing returns.

DeFi operates through smart contracts that are transparent, composable, and permissionless. "Composability" means DeFi protocols can be combined like building blocks — a concept called "money legos." For example, you can deposit tokens into a lending protocol, use the receipt tokens as collateral elsewhere, and earn yield on both.

Key risks include smart contract vulnerabilities, impermanent loss in liquidity pools, liquidation risk in leveraged positions, and regulatory uncertainty. Total Value Locked (TVL) is a key metric for measuring DeFi adoption.