DeFi protocols are basically autonomous programs that automate functions of the traditional finance sector through the use of smart contracts (i.e., open-source code). Protocols disintermediate the middleman (i.e., banks and other financial institutions) by allowing for computer code to drive financial functions.
DeFi protocols are introducing financial instruments throughout the crypto economy. Many DeFi protocols have become integral parts of a crypto ecosystem with launching tokens to help govern their functions, upgrades, and feature roadmap. These protocols enable lending, borrowing, swapping, and yield generation of digital assets with no intermediary creating a more efficient financial ecosystem.
Relevance of DeFi Protocols
On a technical level, protocols can be considered as the rules written for governing tasks and activities. DeFi protocols can feature a set of rules and principles in line with established institutions.
Protocols are essential for operating the DeFi ecosystem and the broader crypto economy. DeFi protocols offer liquidity in the DeFi ecosystem while also ensuring interoperability since all code is open-source protocols are able to build ontop of one another. Because of this, multiple protocols could use other DeFi protocols for building decentralized applications.