DeFi, short for decentralized finance, refers to a set of financial applications built on blockchains that aim to recreate services like lending, borrowing, and trading without relying on a traditional bank or broker in the middle. Instead, these services run on smart contracts, which are self-executing pieces of code that enforce the rules automatically.
For example, in a DeFi lending protocol, you might deposit cryptocurrency into a smart contract and earn interest, while someone else borrows against collateral they have deposited, all without either party needing to apply through a bank.
DeFi has grown quickly because it can operate continuously, across borders, without requiring approval from a central institution. At the same time, it carries real risks, including bugs in the smart contract code and the lack of a safety net like deposit insurance if something goes wrong.