Crypto basics

What Is DeFi and How Does Decentralized Finance Work?

DeFi is a broad group of protocols that provide financial functions through smart contracts and blockchain networks.

What it includes

DeFi can include decentralized exchanges, lending, liquid staking and other protocols. Each project has its own mechanics and risks.

Smart contracts

Operations are governed by code. That can reduce some intermediaries but puts more responsibility on software, permissions and user decisions.

Liquidity and yield

Some protocols reward liquidity providers. Advertised yield does not remove market, smart-contract or liquidity risk.

How to research

Check audits, contracts, permissions, history, network and economic design. Do not use headline yield as your only filter.

FAQ

Does DeFi mean no risk?

No. Smart contracts, oracles, liquidity, governance and markets can all create risks.

Do you need a centralized exchange for DeFi?

No. Many DeFi applications can be accessed through a wallet and decentralized protocols.

Source

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