DeFi — decentralized finance is a transformation of access to financial services

Decentralized Finance, or DeFi, is an ecosystem of financial applications built on blockchain technology that provides services without intermediaries. Unlike the traditional banking sector, DeFi is a system where anyone can access lending, asset trading, savings, and investing using only an internet connection and a cryptocurrency wallet. Modern DeFi has already demonstrated that decentralized finance is not just an innovation but a necessary complement to existing financial infrastructure.

Why Decentralized Finance Is a Solution for the Global Economy

The traditional financial system has relied for centuries on centralized intermediaries—banks, brokers, payment systems. This model has created two key issues that remain relevant today.

The first problem is lack of trust. Financial history is full of crises—from bank collapses to hyperinflation—that have affected billions of people. In a centralized model, one organization controls large volumes of user assets, creating a single point of vulnerability.

The second problem is exclusion. About 1.7 billion adults worldwide lack access to basic financial tools. They cannot open savings accounts, obtain loans, or send remittances without high fees and delays. For these people, decentralized finance offers a real chance at financial independence.

Blockchain technology has created the possibility to free currency from central bank control. DeFi goes further—taking the financial system out of the hands of governments and banks. Now users can get a loan in 3 minutes, open an account almost instantly, transfer funds across borders in minutes instead of weeks, and invest in assets previously accessible only to professionals.

Smart Contracts: The Technological Foundation of Decentralized Finance

DeFi is not just an idea—it’s a working system based on smart contracts. A smart contract is a computer program stored on the blockchain that automatically executes predefined actions when certain conditions are met. For example, a smart contract can automatically issue a loan if the user provides sufficient collateral or distribute rewards among liquidity pool participants.

Ethereum revolutionized this area by introducing the Ethereum Virtual Machine (EVM)—a computing engine capable of executing complex programs. Developers write smart contracts in Solidity and Vyper, which are then compiled into EVM bytecode. Thanks to its flexibility and power, Ethereum has become the second-largest cryptocurrency after Bitcoin and hosts most DeFi applications.

However, Ethereum is not the only platform. Cardano, Polkadot, Solana, TRON, EOS, and Cosmos offer alternative approaches to scalability and architecture. Some are more technologically advanced, but Ethereum maintains dominance due to network effects and its developer ecosystem. According to DeFiPrime, out of 202 existing DeFi projects, 178 are deployed on Ethereum, confirming its leadership.

How DeFi Differs from the Traditional System

DeFi is not just an alternative but a direct opposite to centralized finance (CeFi). The differences are fundamental:

Transparency. In DeFi, all processes and fees are defined directly in the smart contract code, not hidden behind internal bank policies. Participants can see all transactions, and no one can manipulate them without others knowing. This eliminates a single point of failure, often targeted by hackers.

Speed and Cost. The absence of intermediaries means transactions are processed quickly. International payments in DeFi are completed in minutes instead of days, with significantly lower fees than traditional banks. The system does not require coordination between banks across countries or regulatory approval in each jurisdiction.

Control and Responsibility. In DeFi, you have full control over your assets via private keys. You bear responsibility for security—there’s no backup if you lose your password. This approach is cost-effective for financial institutions, which no longer need to spend large sums on asset security and insurance.

24/7 Operation. DeFi markets operate around the clock, without weekends or time zones. Liquidity is available at any moment, unlike traditional markets that close at the end of the day.

Data Security. Data is stored in an immutable, cryptographically protected form within smart contracts. DeFi uses a peer-to-peer model where all participants have access to information, preventing manipulation by malicious insiders or external attackers.

Main Applications: How DeFi Works in Practice

DeFi is a modular system built on three fundamental financial primitives—basic building blocks from which more complex services are constructed.

Decentralized Exchanges (DEXs) and Asset Trading

DEXs enable users to trade crypto assets fully decentralized, without KYC or regional restrictions. There are two main types: order book-based exchanges (where demand and supply are tracked) and liquidity pool-based exchanges (where users add assets to pools and earn fees).

Liquidity pools are based on AMM (Automated Market Maker) smart contracts that use mathematical algorithms to facilitate trading. Currently, over $26 billion worth of assets are locked in DEXs, and this segment continues to grow.

Stablecoins: Stability in a Volatile World

Stablecoins are pegged to a stable asset (usually USD) or a basket of assets, protecting against cryptocurrency price fluctuations. There are four types:

• Fiat-backed (USDT, USDC, BUSD)—pegged 1:1 to USD
• Crypto-collateralized (DAI, sUSD)—backed by excess collateral in ETH or BTC
• Commodity-backed (PAXG)—pegged to gold or other commodities
• Algorithmic (AMPL, ESD)—use algorithms to control price without collateral

Stablecoins have reached a market capitalization of $146 billion and form the backbone of the DeFi ecosystem. A unique feature is chain-agnosticism: for example, Tether exists on Ethereum, TRON, OMNI, and other platforms.

Lending Markets: Borrowing and Interest Rates

Lending is at the heart of DeFi. Lending protocols hold over $38 billion in locked funds, nearly 50% of total TVL in DeFi. The process differs significantly from banking:

• Borrowers do not provide documents or credit history—only collateral and wallet address.
• Lenders earn interest on idle assets, creating a P2P market.
• All interest rates are determined algorithmically based on supply and demand.

Ways to Earn in the DeFi Ecosystem

DeFi is not only a platform for savings but also a powerful tool for generating passive income.

Staking—holding cryptocurrencies that use Proof-of-Stake (PoS) consensus mechanisms. Staking pools function like savings accounts, allowing users to add assets and earn rewards in percentage terms.

Yield Farming—a more complex strategy where users add assets to liquidity pools on DEXs. AMM protocols pay out fees and rewards in APY for providing liquidity.

Liquidity Mining—similar to farming, but using liquidity provider (LP) tokens or governance tokens instead of AMMs.

Crowdfunding—investing in new DeFi projects in exchange for tokens or future profit shares. Peer-to-peer crowdfunding allows transparent, permissionless fundraising.

Risks and Challenges for DeFi Participants

Despite its potential, DeFi carries risks:

Smart Contract Vulnerabilities. Hacks targeting DeFi protocols resulted in losses of $4.75 billion in 2022 (according to Hacken), more than $3 billion in 2021. Code vulnerabilities can be exploited by malicious actors.

Fraud and Scams. High anonymity and lack of KYC create conditions for rug pulls (developers stealing investor funds) and pump-and-dump schemes. These remain major barriers for institutional investors.

Impermanent Loss. In liquidity pools, prices of two tokens can diverge at different rates. If one token surges while the other remains stable, you may lose potential gains. This risk cannot be fully eliminated due to crypto market volatility.

Leverage and Derivatives. Some DeFi apps offer leverage up to 100x on futures, attractive for winning positions but risking huge losses if the market moves against you.

Unverified Tokens. Many investors do not perform due diligence before entering new projects. Tokens without reputable developers or support often lead to significant losses.

Regulatory Uncertainty. Although DeFi holds billions in assets, it is largely unregulated. Governments are still figuring out how to regulate it. Investors who lose funds to scams have little legal recourse.

Platform Competition and the Future of DeFi

Ethereum clearly dominates the DeFi ecosystem due to network effects and being a pioneer, but alternative platforms are gaining popularity. ETH 2.0 with sharding and PoS aims to improve scalability and reduce fees. Competition between Ethereum and other chains is expected to intensify as the ecosystem grows.

The future of DeFi involves not just trading and borrowing but also complex applications like derivatives, asset management, insurance, and synthetic assets. DeFi is gradually integrating with traditional finance, creating hybrid solutions.

Why Decentralized Finance Matters

DeFi is a financial system built on blockchain that democratizes access to financial services. By removing intermediaries, DeFi addresses trust and exclusion issues that have plagued traditional finance for centuries.

The system operates through smart contracts—self-executing programs that automate financial operations without third parties. Main applications—DEXs, stablecoins, and lending protocols—form a comprehensive financial ecosystem.

While DeFi is a promising technology with real potential, participants must consider risks—from technical vulnerabilities to scams. As the ecosystem develops and regulation emerges, DeFi could truly transform the global financial system, making it more open, transparent, and inclusive for everyone.