What Is DeFi? Understanding Decentralized Financial Protocols

Defining Decentralized Finance

Decentralized Finance (DeFi) refers to an umbrella term for peer-to-peer financial services built on public blockchain networks without traditional intermediaries like clearinghouses or centralized brokers.

Core DeFi Primitives

• Automated Market Makers (AMMs): Replace order books with mathematical liquidity pools governed by constant product formulas like x * y = k.
• Over-Collateralized Lending: Allows autonomous lending and borrowing where borrowers lock cryptographic collateral exceeding the loan value, eliminating credit checks.
• Stablecoins: Cryptographic tokens engineered to maintain a 1:1 peg with a reference currency (such as the US Dollar) via algorithmic reserves or fiat backing.