DeFi Protocols: Understanding Decentralized Finance
Decentralized Finance (DeFi) represents a paradigm shift in financial services, offering traditional banking functions through blockchain technology.
What is DeFi?
Decentralized Finance (DeFi) is a financial system built on blockchain technology that aims to recreate traditional financial services in a decentralized manner, eliminating the need for intermediaries like banks.
Core DeFi Components
Lending Protocols
Platforms like Aave and Compound allow users to lend and borrow cryptocurrency assets without traditional banking intermediaries. Users can earn interest on their deposits or borrow against their collateral.
Decentralized Exchanges (DEXs)
DEXs like Uniswap and SushiSwap enable peer-to-peer trading of cryptocurrency assets without requiring a centralized exchange to hold user funds.
Yield Farming
Yield farming involves providing liquidity to DeFi protocols in exchange for rewards, often in the form of additional tokens.
Risks and Considerations
DeFi protocols come with unique risks including smart contract vulnerabilities, impermanent loss, and the experimental nature of many protocols.