Decentralized Finance (DeFi) and Its Impact on Traditional Financial Systems: A Comparative Analysis

Abstract

It is stated that the Decentralized Finance (DeFi) is transforming the financial industry because it provides its users with such services as lending, borrowing, trading, and insurance on decentralized terms using blockchain technology. DeFi is cheaper, transparent, and secure because it is developed on decentralized platforms, including Ethereum. But it is also encircled by such threats as regulatory risk, security risk and market risk. In this paper, the comparison of the DeFi and traditional financial systems will be presented involving such central capabilities of the DeFi as decentralized exchanges, liquidity pools, and lending platforms. It also mentions the discrepancies in rules, the positives of financial inclusions and the DeFi negatives such as volatility and absence of consumer protections. The paper gives a concluding look at what traditional institutions and regulators can do to react and cooperate with DeFi.