Decentralized Finance: Rethinking the Financial System

DeFi meaning — understanding the revolution in finance

When we talk about decentralized finance, we mean an ecosystem of financial technologies operating without centralized intermediaries. Unlike traditional banking, DeFi is an architecture of financial services built on blockchain technology, where lending, borrowing, payments, and asset trading occur directly between users.

Let’s start with a simple fact to reveal the defi meaning: today, 1.7 billion adults worldwide do not have access to bank accounts. They are cut off from credit, savings, and basic financial tools. DeFi radically changes this situation — now, you can get a loan in less than three minutes, open a savings account almost instantly, and make international transfers in minutes instead of days.

Why did decentralized finance emerge right now?

History shows that the centralized financial system is vulnerable. Banks and financial institutions have accumulated problems over centuries: crises, hyperinflation, manipulation, and abuse of trust. Blockchain technology dispersed this control, allowing the creation of a financial space without intermediaries and without a single point of failure.

The technical foundation of DeFi is based on smart contracts — programs that automatically execute when predefined conditions are met. Ethereum introduced this capability through the Ethereum Virtual Machine (EVM), enabling developers to write complex financial protocols in languages like Solidity and Vyper.

DeFi architecture: three financial primitives

Decentralized exchanges (DEX)

Today, over $26 billion dollars are locked on all DEX platforms. These platforms operate on two models:

Order book-based models — the classic system where buyers and sellers place their offers.

Liquidity platforms — AMM (automated market makers), which use pools of assets and mathematical algorithms to set prices. Such DEXs do not require KYC and allow trading 24/7 without geographical restrictions.

Stablecoins

These are cryptocurrencies pegged to stable assets (most often to the US dollar). Over five years, the market capitalization of stablecoins has exceeded $146 billion, and their role as the foundation of the DeFi ecosystem is invaluable.

There are several types:

• Fiat-collateralized: USDT, USDC (market cap $76.52B), PAX, BUSD — backed by traditional currencies
• Crypto-collateralized: DAI (market cap $4.25B), sUSD, aDAI — overcollateralized with crypto assets to protect against volatility
• Commodity-collateralized: PAXG, DGX, XAUT — backed by physical commodities
• Algorithmic: AMPL, ESD, YAM — governed by algorithms without collateral

Hybrid models (like RSV) combine several types for maximum stability.

Lending markets

Lending and borrowing account for half of the total TVL in the DeFi ecosystem. As of early 2023, protocols had over $38 billion locked, with a total TVL of $89.12 billion.

Unlike banks, DeFi loans do not require documents or credit history — only collateral and wallet address. This opens the P2P lending market to millions of people.

Ethereum dominates, but competition is growing

As of today, out of 202 DeFi projects, 178 operate on Ethereum (Ethereum market cap — $352.80B). However, alternative platforms — Solana, Polkadot, Cardano, TRON, Cosmos — are gradually capturing market share by offering better scalability and speed.

Ethereum gained a dominant position due to network effects and being a pioneer, but the ETH 2.0 upgrade with Proof-of-Stake and sharding could strengthen its position or open space for competitors.

Where to earn in DeFi?

Staking

Users can earn rewards for holding cryptocurrencies in PoS protocols, similar to a savings account.

Yield farming

This is an advanced strategy where investors provide liquidity to DEXs and earn APY. Protocols use this to support trading volumes.

Liquidity mining

Liquidity providers receive LP tokens or governance tokens.

Crowdfunding

DeFi projects allow investors to stake assets in exchange for a share or rewards.

Risks to be aware of

The dynamic development of DeFi is accompanied by serious threats:

Code vulnerabilities — according to Hacken, in 2022, hacking attacks resulted in losses of over $4.75 billion (compared to $3 billion in 2021).

Frauds and rug pulls — high anonymity facilitates scams that steal investors’ funds.

Impermanent loss — sudden price changes of tokens in liquidity pools can lead to losses for users.

Extreme leverage — up to 100x on derivative platforms risks bankruptcy with small fluctuations.

Token risks — new, unproven projects often turn out to be scams.

Regulatory uncertainty — governments still lack clear rules, leaving investors without legal protection.

The future of DeFi: a transformation ahead

DeFi is evolving from simple exchanges and lending into complex products — derivatives, portfolio management, insurance. The sector has progressed from a few applications to infrastructure competing with traditional finance.

The key difference between decentralized finance and the banking system is:

• Transparency: algorithms and rates are openly set, without invisible central authorities
• Speed: transactions are processed in minutes instead of days
• Control: users have full custody of their assets
• Accessibility: markets operate 24/7 without closing and without geographical boundaries
• Privacy: blockchain provides protection against manipulation and unauthorized access

Bitcoin (market cap — $1738.46B) and Ethereum have already proven that a decentralized system can scale. The next decade will determine whether we witness a complete transformation of the global financial architecture.

For the average person, the DeFi meaning boils down to one thing: finance without permission, without borders, accessible to all.