Decentralized Finance (DeFi) products are financial instruments and services constructed on blockchain networks, operating without centralized intermediaries like banks or brokers. These products leverage smart contracts to automate financial transactions, providing permissionless access to services such as lending, borrowing, trading, and insurance. They represent a fundamental shift towards disintermediated financial systems, fostering open and transparent financial operations.
Mechanism
The operational logic of DeFi products relies on smart contracts executed on public blockchains, which govern asset custody, collateralization, and transaction settlement. Users interact directly with these contracts through decentralized applications (dApps), eliminating the need for trust in a central authority. Funds are typically held in algorithmic liquidity pools, enabling peer-to-peer or pool-to-peer financial operations with transparent, auditable rules.
Methodology
The development and deployment of DeFi products adhere to principles of transparency, immutability, and censorship resistance, often utilizing open-source code and community governance models. Risk management strategies involve over-collateralization, liquidation mechanisms, and security audits of smart contracts to mitigate protocol vulnerabilities. The methodological objective is to construct an alternative, globally accessible financial infrastructure that operates autonomously with reduced operational overhead compared to traditional finance.
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