DeFi Revolution: Redefining the Path of Decentralized Finance

Why Does Traditional Finance Need Upgrading?

Approximately 1.7 billion adults worldwide still lack access to basic banking services. This is not just a numerical issue but a systemic flaw—the high barriers and trust crises built by centralized financial institutions. Frequent financial crashes and inflation events in history tell us that relying on a single institution to manage funds carries significant risks.

Against this backdrop, decentralised finance (DeFi) emerged. DeFi leverages blockchain technology to eliminate intermediaries, allowing anyone to access lending and borrowing services in under 3 minutes without complex approval processes or credit checks.

What Is the Core of Decentralised Finance?

DeFi is not just a simple conceptual innovation but an ecosystem of blockchain-based financial applications. This ecosystem consists of three fundamental financial components:

1. Smart Contracts: Automated Financial Rules

Smart contracts are programs stored on the blockchain that execute automatically when predefined conditions are met. Ethereum introduced this innovation through its Virtual Machine (EVM), enabling languages like Solidity and Vyper to compile and run complex financial logic.

While platforms like Cardano, Polkadot, TRON, EOS, Solana, and Cosmos also support smart contracts, Ethereum still dominates due to network effects—out of 202 existing DeFi projects, 178 run on Ethereum.

2. Decentralized Exchanges: Breaking Geographic Barriers

DEXs (Decentralized Exchanges) eliminate KYC requirements and regional restrictions. Currently, over $26 billion is locked in DEXs, where users can swap tokens via AMM (Automated Market Maker)—no order books needed, only liquidity pools.

3. Stablecoins: Anchors Amid Volatility

The market cap of stablecoins has surpassed $146 billion, including four main types:

• Fiat-collateralized: USDT, USDC ($1.00), PAX, BUSD
• Crypto-collateralized: DAI ($1.00), sUSD, aDAI
• Commodity-collateralized: PAXG ($4.56K), DGX
• Algorithmic: AMPL, ESD

DeFi vs Traditional Finance: What Are the Fundamental Differences?

Transparency and Security

Traditional finance relies on intermediary “black box” operations, whereas DeFi is based on P2P consensus mechanisms—each transaction is verifiable, eliminating single points of failure. This directly reduces risks of internal fraud and external attacks targeting high-value assets.

Speed and Cost

International remittances in CeFi systems take days and incur high fees due to multi-country banking coordination and regulatory requirements. DeFi cross-border transactions are completed within minutes at costs as low as 1/10th. The market operates 7 days a week, 24 hours a day, with stable liquidity.

User Sovereignty

DeFi users control their assets by holding private keys, but they must manage their own security. This avoids the huge expenses traditional financial institutions spend on security and insurance, providing users with higher economic efficiency.

Earning Strategies in the DeFi Ecosystem

Staking and Passive Income

Locking crypto assets in staking pools allows users to earn tiered rewards under PoS mechanisms. Similar to traditional savings accounts but with higher yields.

Yield Farming

Providing paired assets to liquidity pools via AMM to earn trading fees and governance tokens. This is the core mechanism for maintaining trading depth on DeFi platforms.

Liquidity Mining

Similar to yield farming but more flexible—users can earn LP tokens or governance tokens as rewards, with shorter lock-up periods.

Major Challenges Facing DeFi

Code Vulnerabilities and Losses

In 2022, hackers stole $4.75 billion through DeFi protocol vulnerabilities, a 58% increase from $3 billion in 2021. Smart contract audits have become a necessary cost.

Fraud and Rug Pulls

High anonymity and lack of KYC create fertile ground for scams. Rug pulls and pump-and-dump schemes were frequent in 2020-2021 and remain major obstacles for institutional entry.

Impermanent Loss Risks

Tokens in liquidity pools can incur losses due to price fluctuations. While historical data analysis can mitigate some risks, complete avoidance is nearly impossible.

Leverage Traps

Some derivatives platforms offer up to 100x leverage, enticing but dangerous. Under high volatility, leveraged positions are prone to liquidation.

Regulatory Vacuum

Although DeFi TVL (Total Value Locked) reaches billions of dollars, it is almost unregulated by financial authorities. Investors facing fraud cannot recover funds through legal means.

Key Participants in the Ecosystem

Ethereum’s Dominance

Bitcoin ($87.31K) and Ethereum ($2.92K) are the two main cryptocurrencies, but Ethereum is the true infrastructure for DeFi. Ethereum 2.0’s upgrades with sharding and PoS aim to further enhance performance but face competition from platforms like Solana ($121.84).

Other platforms like Cosmos ($2.00) and the ADA ecosystem are also actively building, but network effects remain a significant advantage.

Summary

Decentralised finance represents a path toward financial democratization—anyone, anywhere, anytime can participate. From DEXs to stablecoins and lending protocols, DeFi constructs an alternative system through three layers of primitive financial components.

However, this path is not without obstacles. Code risks, fraud, impermanent loss, leverage traps, and regulatory uncertainties require participants to stay vigilant. In the future, with improved regulatory frameworks, enhanced security standards, and deeper user education, DeFi can truly become a powerful competitor to mainstream finance. Currently, thorough research and cautious participation remain the primary recommendations.