DeFi protocol is a set of codes that govern how digital assets are used on a blockchain network. Tapping smart contracts and virtual machines (VMs), DeFi protocols manage exchanges, enable users to lend and borrow, and run decentralized autonomous organizations (DAOs). Given that Ethereum is the largest programmable blockchain network for decentralized finance (DeFi), the virtual machine is typically an EVM. Nonetheless, DeFi protocols, or decentralized applications (dApps), refer to all programmable blockchain networks outside of Bitcoin. Bitcoin is the largest cryptocurrency but is not associated with DeFi protocols. How is that possible? All open-source and public blockchains employ smart contracts on some level to generate cryptocurrencies. In the case of the Bitcoin network, it generates BTC. Bitcoin’s embedded smart contract governs how many BTC there are (21M), its halving mechanism, and how BTC is trustlessly sent between parties. Computer programs run smart contracts on an automated basis. When these predefined events occur, smart contracts execute actions without the need for third-party arbitrage. This is how we get decentralized applications — dApps — because their code is on a decentralized blockchain, which is essentially a distributed database.
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