DECENTRALIZED FINANCE IN THE MODERN FINANCIAL SYSTEM: DEVELOPMENT AND RISKS

Abstract

Decentralized finance, known as DeFi, represents a significant movement in the modern financial sphere, offering a transformative approach to traditional financial services. By leveraging blockchain technology, DeFi opens up unprecedented opportunities for individuals and organizations to access financial services and operations in a decentralized manner. Unlike conventional financial systems, which rely on centralized institutions like banks and governments, DeFi operates on decentralized networks, enabling peer-to-peer transactions and financial contracts without the need for intermediaries. This article delves into the development and risks of DeFi in the contemporary financial system, examining how it has evolved from a niche concept into a rapidly growing ecosystem with billions of dollars in total value locked (TVL). The core principles of DeFi include openness, where anyone with an internet connection can participate; accessibility, where financial services are available to a global audience; and transparency, where transactions are recorded on public ledgers, ensuring accountability and reducing the risk of fraud. However, the advantages of DeFi are accompanied by significant drawbacks. The high volatility of cryptocurrencies, the primary assets used in DeFi, poses substantial financial risk to users. The complexity of smart contracts and decentralized applications (dApps) can be daunting for non-technical users, leading to potential losses due to user error. Furthermore, the lack of regulatory oversight raises concerns about the potential for fraud, money laundering, and other illicit activities within the DeFi space. In addition to the existing challenges, this article explores the opportunities for technology advancement and the creation of new financial products in the DeFi context. Innovations such as decentralized lending platforms, automated market makers (AMMs), and yield farming strategies have already demonstrated the potential to disrupt traditional financial models. However, the rapid pace of innovation also introduces new threats, such as the risk of protocol vulnerabilities, security breaches, and the potential for systemic failures in the DeFi ecosystem. The analysis of the findings allows for a better understanding of the potential and limitations of DeFi in the modern financial system. As the DeFi landscape continues to evolve, it will be crucial for stakeholders, including developers, investors, regulators, and users, to carefully navigate the opportunities and risks presented by this emerging field. Ultimately, the future of DeFi will depend on its ability to balance innovation with security, accessibility with complexity, and decentralization with regulatory compliance.