DeFi (Decentralized Finance)
In short: DeFi, short for decentralized finance, is the ecosystem of decentralized financial applications built on public blockchains.
DeFi, short for decentralized finance, is the ecosystem of decentralized financial applications built on public blockchains. Instead of a bank or broker, smart contracts handle lending, borrowing, trading and saving, and users interact with them directly from their own wallets.
Why it matters
Most DeFi applications are permissionless: anyone with a wallet can use them, and their code and transactions are publicly visible on-chain. Because protocols can plug into one another, a token earned in one application can serve as collateral in another. The same openness brings risks a bank account does not have, such as smart contract bugs, manipulated price oracles, sudden liquidations and outright scams, and there is usually no customer support or deposit insurance to fall back on.
Example
A user deposits ETH into a lending protocol as collateral and borrows a stablecoin against it. The smart contract tracks the loan continuously. If the value of the ETH drops too far relative to the debt, the contract allows others to repay part of the loan and claim some of the collateral at a discount, a process called liquidation.