What does "Defi" mean?

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"DeFi," short for "Decentralized Finance," uses blockchain technology to provide financial services directly between users without the need for banks or other intermediaries. By using smart contracts, DeFi allows for peer-to-peer lending, borrowing, and trading, reducing the need for traditional financial institutions. It not only replicates some aspects of traditional finance but also introduces new models that conventional systems can't offer. DeFi increases transparency, makes financial services more accessible, and gives users more control. Its decentralized nature helps create a more inclusive financial system, lowering costs and improving efficiency, making it a strong and censorship-resistant alternative to Centralized Finance (CeFi) and traditional finance (TradFi).

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Here is an example for a popular DeFi application:

Aave is one of the most popular DeFi applications, providing a decentralized platform for lending and borrowing cryptocurrencies without the need for traditional banks or financial intermediaries. By using smart contracts on the Ethereum blockchain, Aave enables users to earn interest on their crypto assets or take out loans by providing collateral, all managed automatically by code.

Suppose you have 2,000 USDC (a stablecoin pegged to the U.S. dollar) and want to earn interest instead of letting it sit idle. You can deposit your USDC into Aave’s lending pool. This pool is then available for other users who want to borrow USDC, and in return, you earn interest based on the demand for borrowing.

Now, imagine someone else needs a quick loan of USDC to make a cryptocurrency trade. They use Aave to borrow your USDC by putting up 1 ETH (Ethereum) as collateral. The entire process is managed by Aave’s smart contracts, ensuring that your funds are secure. While your USDC is lent out, you continue to earn interest. Once the borrower repays the loan, you get your USDC back along with the interest you earned.

This example shows how Aave lets you earn interest or borrow funds quickly and securely without relying on a traditional bank. Importantly, your funds remain under your control, protected by smart contracts, and the counterparty risk is minimized because you trust the transparent and secure decentralized system, not a bank.