Decentralized Finance (DeFi): Reshaping Traditional Banking Systems
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Abstract
Decentralized Finance (DeFi) has emerged as a revolutionary paradigm in the global financial ecosystem, challenging the conventional banking systems by utilizing blockchain technology and smart contracts. This paper explores the rise of DeFi, its foundational principles, and its impact on traditional financial systems. DeFi eliminates the need for intermediaries such as banks, enabling peer-to-peer financial services such as lending, borrowing, trading, and asset management. By leveraging decentralized protocols, DeFi offers greater financial inclusion, transparency, and security, while providing users with complete control over their assets. The paper critically evaluates the advantages of DeFi, including reduced transaction costs, faster processing times, and the democratization of financial services. It also highlights the challenges and risks, such as regulatory uncertainty, scalability issues, and security vulnerabilities that could hinder widespread adoption. Furthermore, the review examines key DeFi applications, such as decentralized exchanges (DEXs), liquidity pools, and stablecoins, that are reshaping financial practices. While DeFi holds the potential to disrupt traditional banking by providing innovative alternatives, it also raises concerns related to market volatility and the lack of consumer protection. The paper concludes by reflecting on the future of DeFi, including its integration with mainstream finance and the regulatory frameworks that may shape its evolution. As DeFi continues to gain traction, understanding its potential and limitations is essential for policymakers, financial institutions, and participants in the global financial markets.