What is DeFi on Ethereum?
Decentralized Finance, or DeFi, refers to a financial ecosystem built on blockchain technology that provides various financial services without the need for traditional intermediaries like banks or brokerages. Ethereum, as the leading smart contract platform, is at the forefront of the DeFi revolution, enabling developers to create a new generation of financial applications.
Ethereum's blockchain allows for the execution of smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. This capability enables a range of DeFi applications, including decentralized exchanges (DEXs), lending protocols, yield farming, and stablecoins. Users can trade assets, lend or borrow funds, and earn interest on their cryptocurrencies—all without the need for a central authority.
The open-source nature of DeFi projects encourages innovation and collaboration within the Ethereum ecosystem. Prominent DeFi protocols include Uniswap for trading, Compound for lending, and Aave for borrowing. These platforms leverage liquidity pools, where users contribute assets to facilitate trading and earn rewards.
However, participating in DeFi also comes with risks, such as smart contract vulnerabilities and market volatility. Despite these challenges, the DeFi sector continues to grow rapidly, attracting both retail and institutional investors seeking greater financial autonomy and access to diverse financial products.