Decentralized finance (DeFi)

What is DeFi in simple words

DeFi (decentralized finance) is a system of financial services that works directly between people using blockchain technology, completely excluding banks, brokers, insurance companies and other intermediaries. Instead of bank managers and documents, actions are regulated by smart contracts — small programs that automatically fulfill the terms of a deal when the predetermined requirements are met (“if... then...” logic). Unlike traditional banks, in DeFi you yourself own your money through private keys. No one can freeze your account, restrict operations or cancel a transaction. Any person in the world with the internet and a crypto wallet can use the services. For this, you do not need to confirm income, show a passport or pass a credit check. DeFi is one of the fastest growing areas of the crypto industry, with the total volume of locked funds (TVL — Total Value Locked) exceeding tens of billions of dollars. You can learn about how blockchain technology works in the article Blockchain.

Main directions in DeFi

The DeFi ecosystem includes several key directions, each of which offers an alternative to traditional financial services. Decentralized exchanges (DEX) — platforms for exchanging cryptocurrencies directly between participants, without transferring assets to the exchange's own balance. Trading happens through smart contracts that automatically find counter orders or use liquidity pools. Popular DEXs: Uniswap (on Ethereum), PancakeSwap (on BSC), SushiSwap, Curve. Advantages: full control over funds, no registration required, anonymity. Disadvantages: may be more difficult to use than centralized exchanges, sometimes higher fees. Crypto lending — services that allow you to lend your assets at interest (becoming a lender) or take loans collateralized by another cryptocurrency (becoming a borrower). Interest rates are formed dynamically based on supply and demand. Popular platforms: Aave, Compound, MakerDAO. Advantages: passive income for lenders, quick access to liquidity for borrowers without selling assets. Staking and yield farming — locking cryptocurrency in a system to support its operation with the possibility of receiving a reward (an analogue of a bank deposit, but with higher interest rates and risks). Staking usually involves locking tokens to support the network (Proof-of-Stake), while farming involves providing liquidity to pools on DEXs. Stablecoins — cryptocurrencies pegged to real assets (usually to the US dollar) for the convenience of payments and value preservation. Main stablecoins: USDT (Tether), USDC (Circle), DAI (decentralized, collateralized by cryptocurrency). Decentralized insurance protocols — insurance against smart contract failures, hacks and other risks in DeFi.

Technical aspects of DeFi

DeFi protocols are built on smart contracts that are deployed in blockchains with support for programmable logic, mainly on Ethereum, as well as on BSC, Solana, Polygon, Avalanche and other networks. Smart contracts are written in Solidity (Ethereum) or Rust (Solana) and undergo a security audit before launch. Interaction with DeFi protocols is carried out through web interfaces (dApps — decentralized applications) that connect to the user's wallet (for example, MetaMask, Trust Wallet) and allow making transactions. Each operation requires paying a network fee (gas), which depends on the load of the blockchain. An important component of DeFi is oracles — services that supply data from the outside world to smart contracts (asset prices, exchange rates, event results). Popular oracles: Chainlink, Band Protocol. Without oracles, DeFi protocols could not determine the value of collateral and calculate liquidation thresholds. Smart contract technology is the basis of all DeFi applications, ensuring automatic execution of deal terms.

Risks of DeFi

DeFi is associated with a number of risks that must be taken into account before participating. Smart contract vulnerabilities — if the platform's code has an error (bug), hackers can use it to steal funds. Even contracts checked by auditors do not guarantee complete security. Impermanent loss — the risk of losing part of the funds when providing liquidity to pools, if the price of one of the tokens in the pair changes strongly compared to the moment of depositing funds. Losses become permanent only when funds are withdrawn from the pool. Lack of regulation — in case of theft, error or fraud, no one will be able to cancel the transaction or return the funds. There is no deposit insurance (like the DIA in Russia) and no support service that can help. Liquidity risks — in some protocols there may not be enough liquidity to withdraw funds at the right moment. Market risks — the high volatility of cryptocurrencies can lead to significant capital losses, especially when using borrowed funds (leverage). Oracle risks — DeFi protocols often rely on oracles (external price data sources), which can be compromised or provide incorrect data, leading to incorrect calculations and losses.

Regulation of DeFi in the world and in Russia

The issue of DeFi regulation remains open in most countries of the world. In Russia, DeFi protocols are formally not prohibited, but they do not have a clear legal status. According to Federal Law 259-FZ “On Digital Financial Assets”, cryptocurrencies are recognized as property, but their use for settlements on the territory of the Russian Federation is limited. DeFi platforms are not financial organizations and are not regulated by the Bank of Russia, which creates legal uncertainty. In the world, approaches to DeFi regulation differ: in the USA, the SEC and CFTC try to classify DeFi tokens as securities; in Europe, within the framework of MiCA (Markets in Crypto-Assets), requirements are introduced for stablecoin issuers; in Singapore and Switzerland, more favorable conditions for the development of DeFi innovations are being created. In Russia, the possibility of creating an experimental legal regime (ELR) for testing DeFi solutions based on domestic blockchain platforms is being discussed. DeFi market participants are recommended to monitor changes in legislation and consult lawyers on taxation and compliance issues.