Decentralized Finance (DeFi)

🔹 Definition

Decentralized Finance (DeFi) refers to a financial ecosystem built on public blockchain networks that enables peer-to-peer financial services—such as lending, borrowing, trading, and asset management—without relying on traditional centralized intermediaries like banks or brokers. DeFi platforms operate through smart contracts, which are self-executing code deployed on blockchains (e.g., Ethereum), allowing transparent, automated, and permissionless transactions.

DeFi is rapidly transforming financial infrastructure but also presents unique compliance, cybersecurity, and anti-money laundering (AML) risks due to its open and pseudonymous nature.

🔹 Frequently Asked Questions (FAQs)

Q1: What are common DeFi services and use cases?

• Decentralized exchanges (DEXs) for crypto asset trading
• Lending and borrowing protocols (e.g., Aave, Compound)
• Stablecoins and synthetic assets
• Yield farming and liquidity provision
• Staking and automated investment strategies

Q2: How is DeFi different from traditional finance (TradFi)?

• No central authority: Users interact directly with protocols, not banks
• Open access: Anyone with a crypto wallet can participate
• Smart contracts: Automate transactions, reducing the need for intermediaries
• Non-custodial: Users retain control of their assets

Q3: What are the regulatory concerns with DeFi?

• Lack of KYC/AML controls
• Use of mixers and privacy tokens to obfuscate fund flows
• Risk of fraud, market manipulation, and smart contract exploits
• Difficulty in assigning legal accountability due to protocol decentralization

Q4: How can compliance be applied to DeFi?
Emerging solutions include:

• Decentralized identity (DID) and verifiable credentials
• On-chain analytics tools to trace wallet activity and flag suspicious behavior
• Regulatory frameworks (e.g., EU’s MiCA and FATF guidance) urging DeFi developers and governance participants to adopt AML/CFT controls where effective control exists