The Rise of Defi

Abstract

Decentralized Finance (DeFi) is rapidly transforming the traditional financial system by introducing a permissionless, transparent, and trustless financial ecosystem powered by blockchain technology. It eliminates intermediaries by utilizing smart contracts on public blockchains like Ethereum, thereby promoting financial inclusion and operational efficiency. This paper explores the fundamental concepts of DeFi, the underlying technology including Ethereum, smart contracts, and Layer 2 solutions, and the wide array of its applications such as (DEXs), lending/borrowing platforms, yield farming, and stablecoins. In addition to examining the functional advantages of DeFi like reduced transaction costs and increased accessibility, the paper also critically analyzes the potential risks including smart contract vulnerabilities, regulatory concerns, and systemic dependencies. A special focus is given to the Indian regulatory framework and how it compares with global jurisdictions. The paper concludes with a discussion on the future prospects of DeFi .