A DeFi protocol is a set of smart contracts that provides a financial service, such as trading, lending, or earning, without a central company running it. Because the rules are written in code on a blockchain, anyone can interact with the protocol directly from their own wallet.
Protocols cover many functions. Some run decentralized exchanges, others handle lending and borrowing, and others offer more specialised services. They are often described as building blocks, since they can connect to one another, letting developers combine them in new ways.
This openness brings both benefits and risks. There is no central gatekeeper, but there is also no company to reverse mistakes, and the underlying code can contain flaws. Understanding what a protocol is helps make sense of DeFi, while keeping in mind that using one carries real, self-managed risk.
Frequently Asked Questions
What does a DeFi protocol do?
It provides a financial service, such as trading, lending, or earning, through smart contracts on a blockchain, letting people interact directly without a central company.
Why are DeFi protocols considered risky?
Because there is no central party to reverse mistakes or guarantee outcomes, and the underlying smart contract code can contain flaws that may be exploited.
