<p>Decentralized Finance, or DeFi, is a financial system that operates on blockchain technology, allowing for peer-to-peer financial services without the need for intermediaries like banks. It's a rapidly growing sector in the crypto world, with a focus on creating open-source, permissionless, and trustless financial service ecosystems accessible to everyone with an internet connection.</p>

<h2>How It Works</h2>
<p>DeFi platforms leverage smart contracts, self-executing contracts with the terms of the agreement directly written into lines of code. Here's a simplified breakdown of how DeFi works:</p>
<ul>
  <li><strong>Blockchain Infrastructure</strong>: DeFi platforms are built on blockchains, with <a href="/NewSite/encyclopedia/ethereum/" class="ency-link">Ethereum</a> being the most popular due to its <a href="/NewSite/encyclopedia/smart-contract/" class="ency-link">smart contract</a> functionality.</li>
  <li><strong>Smart Contracts</strong>: Users interact with DeFi platforms through smart contracts, which automate the execution of agreements once predefined conditions are met.</li>
  <li><strong>Liquidity Pools</strong>: Many DeFi platforms use liquidity pools, where users can deposit assets to facilitate trading and earn passive income through fees and interest.</li>
  <li><strong>Decentralized Exchanges (DEXs)</strong>: DeFi platforms often include DEXs, allowing users to trade cryptocurrencies directly from their wallets without the need for centralized exchanges.</li>
</ul>

<h2>Why It Matters</h2>
<p>DeFi matters for several reasons:</p>
<ul>
  <li><strong>Financial Inclusion</strong>: DeFi can provide access to financial services for the unbanked and underbanked, as it only requires an internet connection and a compatible device.</li>
  <li><strong>Transparency and Security</strong>: DeFi platforms are open-source and transparent, with smart contracts' code publicly available for anyone to review. This transparency, combined with blockchain's immutability, enhances security and trust.</li>
  <li><strong>Yield Farming and Liquidity Mining</strong>: Users can earn passive income by providing liquidity to DeFi platforms, a process known as yield farming or liquidity mining.</li>
  <li><strong>Interoperability</strong>: DeFi platforms can interact with each other, allowing users to create complex financial products and services by combining different DeFi protocols.</li>
</ul>