$ETH Decentralized finance (often stylized as DeFi) provides financial instruments and services through smart contracts on a programmable, permissionless blockchain. This approach reduces the need for intermediaries such as brokerages, exchanges, or banks.[1] DeFi platforms enable users to lend or borrow funds, speculate on asset price movements using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.[2] The DeFi ecosystem is built on a layered architecture and highly composable building blocks.[3] While some applications offer high interest rates,[2] they carry high risks.[4] Coding errors and hacks are a common challenge in DeFi.[5][2] DeFi protocols exhibit varying degrees of decentralization, with truly decentralized protocols potentially acting as neutral infrastructure, while false decentralization leaves protocols open to manipulation and fraud or to being regulated as financial intermediaries.[6]intralized exchanges (abbreviated DEXs) are alternative payment ecosystems that use new protocols for financial transactions. They emerged within decentralized finance (DeFi),[3] a sector of blockchain technology and fintech.[7]Centralized exchanges (CEXs), DEXs and DEX aggregators are all built on a multi-layered DeFi architecture, with each layer serving a well-defined purpose.[3] (See Figure: Multi-layered Architecture of the DeFi Stack).While they share common components of the first four layers, such as the Settlement layer, Asset layer, Protocol layer and Application layer, DEX aggregators have an additional component or Aggregator layer, which allows them to connect and interact with other DEXs via smart contracts.
The Ethereum blockchain popularized smart contracts, which are the basis of DeFi, in 2017. Other blockchains have since implemented smart contracts.As of 2021, MakerDAO was a prominent lending DeFi platform based on a stablecoin that was established in 2017.[8][9] It allowed users to borrow DAI, a token pegged to the US dollar. Through a set of smart contracts that govern the loan, repayment, and liquidation processes, MakerDAO aimed to maintain the stable value of DAI in a decentralized and autonomous manner.[10][11][needs update] In September 2024, MakerDAO rebranded as Sky, and its stablecoin DAI was renamed USDS.[12] As of March 2025, the combined circulating supply of DAI and USDS stood at approximately $9 billion.[13]In June 2020, Compound Finance, a decentralized finance protocol enabling users to lend or borrow cryptocurrency assets and which provides typical interest payments to lenders, started rewarding lenders and borrowers with a cryptocurrency called Comp. This token, which is used for running Compound, can also be traded on cryptocurrency exchanges. Other platforms followed suit, leading to stacked investment opportunities known as "yield farming" or "liquidity mining", where speculators shift cryptocurrency assets between pools in a platform and between platforms to maximize their total yield, which includes not only interest and fees but also the value of additional tokens received as rewards.[14]In July 2020, The Washington Post described decentralized finance techniques and the risks involved.[14] In September 2020, Bloomberg said that DeFi made up two-thirds of the cryptocurrency market in terms of price changes and that DeFi collateral levels had reached $9 billion.[15] Ethereum saw a rise in developers during 2020 due to the increased interest in DeFi.[16] Total collateral levels across DeFi protocols reached a peak of $178 billion in November 2021, before declining to under $40 billion by 2023 amid broader downturns in the cryptocurrency market.[17]DeFi has attracted venture capitalists such as Andreessen Horowitz[4] and Michael Novogratz.[18]The Economist regarded the future of digital finance in 2022 as a "three-way fight" between: Big Tech, such as Facebook with its digital wallet; "big rich countries" that have been testing their own digital currencies; and software developers "building all sorts of applications" to decentralize finance. Handling the risks presented by crypto-assets already valued at $2.5 trillion was a particular challenge for US regulators.
