A DeFi (Decentralized Finance) protocol is a blockchain-based financial system that operates without intermediaries like banks or brokers. Built on smart contracts, DeFi protocols enable users to access financial services such as lending, borrowing, trading, and earning interest directly through decentralized applications (dApps). These protocols are typically open-source, permissionless, and operate on public blockchains like Ethereum, allowing anyone with an internet connection to participate.

The key difference between DeFi protocols and traditional financial systems lies in their structure and operation. Traditional finance relies on centralized institutions to manage transactions, enforce rules, and provide trust. In contrast, DeFi protocols use blockchain technology and smart contracts to automate processes, eliminating the need for intermediaries. This decentralization reduces costs, increases transparency, and enhances accessibility, particularly for unbanked or underbanked populations.

Another major distinction is the level of control and ownership. In traditional systems, users must trust institutions to manage their assets, whereas DeFi protocols allow users to retain full control of their funds through private keys. Additionally, DeFi operates 24/7, unlike traditional systems constrained by business hours and geographic limitations.

However, DeFi protocols also face challenges, such as regulatory uncertainty, smart contract vulnerabilities, and scalability issues. Despite these hurdles, DeFi represents a transformative shift in finance, offering a more inclusive, transparent, and efficient alternative to traditional systems.