DeFi (Decentralized Finance) is a blockchain-based form of finance that operates without central financial intermediaries, instead utilizing smart contracts on networks like Ethereum. These smart contracts are autonomous programs that may interact with other contracts and blockchains to perform financial functions.
The primary objective of DeFi is to enhance the profitability of investors by using automated smart contracts designed to maximize yields on invested funds. DeFi represents a rapidly evolving sector with continuous innovation and experimentation in financial products and services.
However, DeFi is often associated with high-risk investments. This is partly because many DeFi projects involve smart contracts that may not have undergone thorough auditing or comprehensive review processes. Audits are critical in assessing the security and functionality of smart contracts but are not always conducted in the DeFi space. A review, while less exhaustive than an audit, also contributes to understanding a project’s reliability but may not be sufficient to mitigate all risks.
Due to these factors, along with its inherent nature of bypassing traditional financial systems and regulatory frameworks, DeFi is generally considered riskier than centralized finance (CeFi) or traditional investment methods. It is crucial for participants in DeFi to understand these risks and the technical aspects of smart contracts and blockchain technology to navigate this innovative yet complex landscape effectively.