How do DeFi platforms work?
Decentralized Finance (DeFi) platforms operate on blockchain technology, allowing users to access financial services without the need for traditional intermediaries like banks. At the core, DeFi platforms utilize smart contracts—self-executing contracts with the terms of the agreement directly written into code.
1. Smart Contracts
These are the backbone of DeFi applications. Smart contracts automate processes such as lending, borrowing, and trading by executing transactions when predefined conditions are met.
2. Decentralized Applications (dApps)
DeFi platforms are built as decentralized applications (dApps) that run on public blockchains. Users can access these dApps through compatible wallets, eliminating the need to trust a central authority.
3. Tokenization
Assets within DeFi are often tokenized, allowing them to be represented as digital tokens on the blockchain. This enables greater liquidity and easier transferability across the ecosystem.
4. Liquidity Pools
DeFi platforms use liquidity pools where users contribute assets to facilitate trading and lending services. In return, liquidity providers earn fees or interest on their contributions.
5. Yield Farming and Staking
Users can engage in yield farming or staking to earn additional tokens or interest by locking their assets in DeFi protocols, enhancing the overall ecosystem's efficiency.
In summary, DeFi platforms leverage blockchain technology and smart contracts to create a transparent, trustless financial system, enabling users to take control over their financial assets.