Introduction to Decentralized Finance (DeFi)

Decentralized Finance (DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks. DeFi leverages smart contracts on blockchains, the most common being Ethereum.

DeFi's total value locked (TVL) grew from $1 billion in June 2020 to over $100 billion by 2021. This rapid growth showcases the potential and increasing trust in decentralized financial systems among investors and developers.

Yield farming allows users to earn rewards by providing liquidity to DeFi platforms. This process involves locking up crypto assets in smart contracts to facilitate trading, lending, and borrowing while earning interest or tokens as incentives.

Despite its benefits, DeFi faces significant risks like smart contract vulnerabilities, lack of regulation, and potential for fraud. In 2020 alone, DeFi platforms experienced over $120 million in losses due to hacks and exploits.

The future of DeFi includes integration with traditional finance, improved security protocols, and wider adoption. Innovations like decentralized insurance and prediction markets are set to expand DeFi's use cases and accessibility.

In 2020, a single DeFi user borrowed $1 billion in a flash loan, repaid within seconds, highlighting DeFi's instant, trustless financial capabilities.