Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is an emerging financial technology based on secure distributed ledgers that removes the control banks and institutions have over money, financial products, and services.
Core Protocols: 1. Lending (Aave). 2. Exchanges (Uniswap). 3. Stablecoins (DAI). 4. Derivatives (Synthetix). Metrics: Total Value Locked (TVL), Volume, slippage, gas fees.
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🧒 Explain Like I'm 5
Imagine a soda machine that also gives out loans. You don't need to talk to a banker or show your ID; you just put in your [collateral](/en/terms/collateral), and the machine gives you the money automatically because the rules are written right into the machine's code. [DeFi](/en/terms/defi) is a giant network of these 'money machines' that never sleep and belong to everyone.
🤓 Expert Deep Dive
Technically, DeFi relies on 'Composability'—the ability for different apps to interact with each other like 'Money Legos'. For example, you can take a 'Flash Loan' from one protocol, trade it on a 'DEX' (Decentralized Exchange) like Uniswap, and deposit the profit in a 'Yield Aggregator'—all in a single transaction. A critical component is the 'Automated [Market Maker](/en/terms/automated-market-maker)' (AMM), which replaces order books with '[Liquidity Pools](/en/terms/liquidity-pools)' and mathematical pricing curves (x*y=k). However, users must be aware of 'Impermanent Loss', which occurs when the price of tokens in a pool changes significantly, and 'Smart Contract Risks', where a bug in the code can lead to a total loss of funds with no recourse.