Crypto Basics #13 — Understanding DeFi

DeFi is short for decentralized finance. It's the name for financial services, lending, borrowing, trading, saving, that run on a blockchain instead of through a bank.

The idea builds directly on smart contracts. Instead of a bank approving a loan or an exchange matching a trade, the whole service is written as code that runs on its own. You interact with the protocol directly from your wallet. There's no account application and no business hours, and in principle anyone with an internet connection can use it.

Two things make DeFi different from traditional finance. The first is transparency: the rules are open-source code that anyone can inspect, and activity is visible on the blockchain. The second is programmability, which means these services can be plugged into each other like building blocks.

That openness is also where the risks sit. If the code has a flaw, there's no bank to refund you, and a mistaken transaction usually can't be reversed. DeFi removes the middleman, which also removes the safety net the middleman provided. It's a powerful part of crypto, best approached with that trade-off clearly in mind.

In short: DeFi is financial services run by open code on a blockchain, with no bank or broker in the middle.

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