In plain English
What Decentralized finance means
DeFi applications commonly let a wallet interact directly with code that defines transaction rules. For example, an automated market maker can quote a token swap from the balances in a liquidity pool, while a lending protocol can calculate collateral requirements and interest under preset rules. The service may still depend on developers, governance participants, price oracles, stablecoins, and centralized access points.
Why it matters
DeFi changes how financial services are delivered and where risks sit. Instead of relying mainly on a bank or broker’s account systems and discretion, users may rely on smart-contract code, collateral rules, blockchain settlement, and external data. These arrangements can introduce technical, liquidity, governance, oracle, custody, and legal risks alongside market risk.
Example
A user deposits 2 ETH worth $6,000 into a lending protocol and borrows $3,000 of a stablecoin. If the protocol requires collateral above a stated threshold, a fall in ETH’s price can trigger liquidation. For example, if the collateral falls to $3,750 while the debt remains near $3,000, a liquidation rule may allow collateral to be sold. Values are simplified.
Quick answers
Common questions
Is DeFi the same as a decentralized exchange?+
No. A decentralized exchange is one type of DeFi application. DeFi also includes lending, collateral management, derivatives, stablecoin arrangements, payments, and other blockchain-based financial functions.
Does DeFi eliminate counterparty risk?+
No. It can replace or redistribute conventional counterparty risk with risks involving smart-contract administrators, token issuers, validators, liquidity providers, price-oracle operators, bridges, and governance mechanisms.
Sources