How it works
DeFi protocols are smart contracts that hold pooled assets and follow programmatic rules: lending pools that automatically set interest rates from supply and demand, decentralised exchanges that price assets from on-chain liquidity pools, and stablecoin issuers backed by collateral inside smart contracts. Users connect a wallet, sign transactions, and the protocol executes the trade or loan on-chain.
Example
You deposit 10,000 USDC into Aave, an on-chain lending protocol, earning a variable supply rate of about 4 percent. Another user borrows that USDC against their ETH collateral at a higher borrow rate. The spread funds the lender’s yield. No bank, no application, no approval. You can withdraw any time, subject to protocol liquidity.
Why it matters
DeFi removes counterparty and access barriers for basic financial services: lending, borrowing, exchange, derivatives. The trade-off is technical and code risk. Smart contract exploits have lost users billions over the protocol’s history. Stick to audited, time-tested protocols; treat new yield farms with the suspicion they deserve.
