What is a DeFi (Decentralized Finance)?
Quick Definition
DeFi refers to financial services and applications built on blockchain technology, operating through smart contracts without traditional intermediaries.
Full Definition
DeFi is a broad category of financial services built on blockchain technology rather than operated by banks, brokers, or other traditional institutions. Lending, borrowing, trading, derivatives, insurance, and asset management all have DeFi equivalents. The defining feature is that these services operate through smart contracts, are typically permissionless to use, and are transparent in their operation.
DeFi exploded in 2020 and has since become a major part of the crypto ecosystem, with tens of billions of dollars in value flowing through DeFi protocols. Leading DeFi protocols include Aave (lending), Uniswap (trading), MakerDAO (the issuer of DAI), among many others.
What DeFi offers and what it costs
DeFi offers several advantages. Services are accessible to anyone with an internet connection and a compatible wallet, operations are transparent and auditable in real time, and users can interact directly with protocols without relying on traditional intermediaries. The composability of DeFi, meaning the ability to combine different protocols into new products and services, has enabled rapid innovation across the ecosystem.
At the same time, DeFi carries meaningful risks, including smart contract vulnerabilities, protocol exploits, design flaws, operational complexity, and limited recourse when problems occur, factors that have historically limited institutional participation despite growing adoption. For institutional capital, these considerations have historically been a barrier to deeper DeFi participation, though that has begun to change.
Steady and DeFi
Steady is designed to be a strong fit for the DeFi ecosystem. STDY can be used in liquidity pools, lending markets, and other DeFi applications. Wrapped Steady (wSTDY) provides a rebase-free token for protocols that don't handle rebasing tokens well. This gives holders the flexibility to use Steady in DeFi while still benefiting from the performance of our underlying reserve assets, even when STDY is deployed elsewhere, the underlying growth still flows back to our holders.
Related Terms
Composability
ReadComposability refers to the ability of different protocols, contracts, and tokens on a blockchain to interact and combine with each other seamlessly.
Liquidity Pool
ReadA liquidity pool is a collection of tokens held in a smart contract that enables decentralized trading, lending, or other financial activities.
Smart Contract
ReadA smart contract is a self-executing program that runs on a blockchain and automatically enforces the terms of an agreement when specific conditions are met.
Wrapped Token
ReadA wrapped token is a token that represents another asset on a different blockchain or in a different form, typically backed 1:1 by the original token or asset.
Yield Farming
ReadYield farming is the practice of moving crypto assets between DeFi protocols to maximize returns from rewards, fees, and incentives.
Other Glossary Items
Learn about common and essential terms related to Steady and other stablecoin protocols.
Algorithmic Stablecoin
ReadAn algorithmic stablecoin attempts to maintain its value through automated rules that adjust token supply based on market demand, rather than holding equivalent reserve assets.
AML
ReadAML (Anti-Money Laundering) refers to the laws, regulations, and procedures designed to prevent the use of financial systems for laundering the proceeds of crime.
APY
ReadAPY, or Annual Percentage Yield, is the standardized rate of return an asset generates over a year, including the effect of compounding.
Arbitrum
ReadArbitrum is a Layer 2 blockchain network built on top of Ethereum, designed to offer faster and cheaper transactions while inheriting Ethereum's security and infrastructure.
Asset Backing
ReadAsset backing refers to the real-world or on-chain assets held by the issuer to support the value of every token in circulation.
Asset Locking
ReadAsset locking refers to restricting access to funds for a defined period or condition, during which they cannot be transferred or used.
Asset Segregation
ReadAsset segregation is the practice of keeping client or backing assets separate from the issuer's operational funds, protecting them from the issuer's other obligations.
Audit
ReadAn audit is an independent examination of a protocol's code, reserves, or operations by qualified third parties to verify accuracy and compliance with stated claims.
Backing
ReadBacking refers to the assets or mechanisms that support a stablecoin's value and help it maintain its intended reference value.
Blockchain Network
ReadA blockchain network is the system of connected participants and infrastructure that validates, records, and maintains data on a specific blockchain.
Blockchain
ReadA blockchain is a distributed digital ledger that records transactions across a network of computers in a secure, transparent, and tamper-resistant way.
Bridge
ReadA bridge is a mechanism that enables the transfer of assets or data between different blockchain networks.
Clarity Act
ReadThe Clarity Act is a proposed US legislative framework intended to clarify the regulatory treatment of digital assets, defining when they should be treated as securities versus commodities.
Collateralization / Over-collateralization
ReadCollateralization refers to the ratio between the value of assets held in reserve and the value of tokens issued. Over-collateralization means holding more in reserves than the value of tokens issued.
Counterparty Exposure
ReadCounterparty exposure refers to the risk that another party, such as a bank, custodian, broker, or service provider fails to fulfill its obligations, potentially affecting the assets or funds it holds.
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