Smart contracts in decentralized finance (DeFi) are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute transactions based on predetermined conditions without the need for intermediaries. This enhances trust and reduces transaction costs, as parties can engage confidently, knowing the contract will fulfill its obligations independently. Additionally, smart contracts enhance transparency since all actions are recorded on the blockchain. They are instrumental in automating various processes within the DeFi ecosystem, making financial transactions more efficient and accessible.