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DeFi

 

short for Decentralized Finance, refers to a movement within the cryptocurrency space that aims to recreate traditional financial systems using blockchain technology. Unlike traditional finance, which relies on centralized institutions like banks and brokers, DeFi platforms are decentralized and operate without intermediaries. They use smart contracts, which are self-executing agreements, to facilitate financial transactions such as lending, borrowing, trading, and earning interest directly on the blockchain.

DeFi allows users to have full control over their financial activities, providing access to financial services without the need for banks or other central authorities. These platforms are often built on Ethereum and other blockchains that support smart contracts, enabling greater transparency and security.

Example: A popular DeFi application is a decentralized lending platform like Aave. On Aave, users can lend their cryptocurrency and earn interest, while others can borrow crypto by providing collateral. For example, if a user has 10 ETH and wants to earn interest, they can deposit their ETH into the Aave protocol. In return, they earn interest from borrowers who need the ETH, and they can withdraw their funds at any time. This entire process happens through smart contracts, ensuring that no bank or third party is involved in managing or approving the transactions. The decentralized nature of DeFi platforms eliminates the need for middlemen, reduces costs, and increases accessibility for users worldwide.