DeFi operates on a permissionless, peer-to-peer model utilizing blockchain technology and smart contracts, enabling services like lending, borrowing, and trading without traditional intermediaries.

Unlike traditional finance, DeFi is fully decentralized and transparent, allowing users to retain control over their assets through private keys, in contrast to centralized institutions and private databases.

This growth is expanding financial access to approximately 1.4 billion unbanked individuals worldwide by bypassing intermediaries and lowering entry barriers.

Liquidity pools and automated market makers (AMMs) facilitate 24/7 trading, reducing costs and increasing efficiency compared to traditional financial systems.

Regulatory uncertainty remains, as governments worldwide work to establish legal frameworks, while issues like high gas fees and scalability on Ethereum continue to impact adoption.

DeFi has seen rapid growth, with its total value locked (TVL) surpassing $148.99 billion as of August 26, 2025, a significant rise from about $800 million in January 2020.

Smart contracts on platforms like Ethereum, Solana, and Binance Smart Chain automate transactions and support decentralized applications such as Uniswap, Aave, and OpenSea.

Despite challenges, institutional interest in DeFi is rising, with major players like BlackRock exploring tokenized assets and integrating real-world assets (RWAs) into the ecosystem.

Advancements such as Layer 2 solutions, cross-chain interoperability, and clearer regulations (e.g., EU’s MiCA, US’s Genesis Act) are expected to enhance scalability, reduce costs, and legitimize DeFi as an alternative to traditional finance.

However, DeFi faces risks including smart contract vulnerabilities, high-profile hacks like the 2022 Poly Network incident where over $600 million was stolen, and the prevalence of fraudulent projects such as rug pulls.