Decentralized Finance

Decentralized finance is a financial model in which financial operations and rules are implemented using blockchains, smart contracts, and cryptographic authorization. Instead of relying entirely on a bank or centralized financial company, users interact directly with software protocols.

Traditional finance normally requires an organization to maintain records, custody assets, approve transactions, or enforce contractual rules. In decentralized finance, some of these functions are transferred to software deployed on a blockchain. For example, a decentralized lending protocol can automatically accept collateral, calculate borrowing capacity, and initiate liquidation when predefined conditions are reached.

A typical DeFi application provides a dApp interface through which users interact with smart contracts. The interface displays information and constructs transaction data, while the blockchain and smart contracts perform the actual state changes.

Decentralized finance includes asset swaps, liquidity provision, lending, borrowing, yield strategies, derivatives, and governance systems. Many of these applications depend on external market information supplied through price oracles.

Decentralization can exist at several different layers. The smart contracts may be publicly deployed while governance, interfaces, oracle infrastructure, or upgrade permissions remain concentrated. Therefore, the term describes an architectural approach rather than guaranteeing that every component is decentralized.

One of the defining properties of decentralized finance is composability. Protocols can interact with one another programmatically, allowing users and developers to construct financial applications from reusable components. This increases functionality but also creates interconnected risks because a failure in one protocol can affect other protocols that depend on it.