The economic system of feudalism in medieval Europe was characterized by the practice of land ownership and reciprocal obligations between different social classes. Lords owned large estates and granted portions of land, known as fiefs, to vassals in exchange for military service and loyalty. This hierarchical system also involved peasants, or serfs, who worked the land and provided agricultural produce in return for protection and a place to live. The relationships were bound by oaths of loyalty, and the economy was predominantly agrarian, resulting in a self-sustained structure where local lords held significant power.