

What is decentralized finance? How does DeFi change traditional finance? Can it replace banking services?
Jul 24, 2025 am 06:45 AMWhat is decentralized finance? How does DeFi change traditional finance? Can it replace banking services?
Decentralized Finance (DeFi), abbreviated as DeFi, is a new generation of open financial system built on blockchain technology . Its core idea is to use smart contracts to re-implement services provided by traditional centralized financial institutions such as lending, transactions, payments and asset management on the blockchain in a decentralized, transparent and license-free manner. Users directly manage their assets through encrypted accounts controlled by themselves without relying on any intermediary institutions, thus realizing true financial autonomy.
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1. The core concept of decentralized finance (DeFi)
1. Open and unlicensed: Anyone can access DeFi applications and services anytime, anywhere as long as he has an Internet connection. There are no entry thresholds and geographical restrictions, providing equal financial opportunities for global users.
2. Transparency and traceability: All transactions and protocol rules are recorded on the public blockchain, and anyone can query and verify, ensuring the high transparency of the entire system and effectively reducing the possibility of information asymmetry and dark box operations.
3. User sovereignty: Users fully control their assets through their own digital asset management tools, and only users holding private keys can operate. This means that the ownership and control of assets are truly returned to individuals, greatly improving asset security.
4. Automation and Composability: DeFi relies on smart contracts to automatically execute financial protocols without manual intervention, improving efficiency and reducing execution risks. At the same time, different DeFi protocols can be combined like Lego bricks to create new financial products and services.
2. How DeFi reshapes traditional finance
1. Reduce transaction costs: Through "de-mediation" , DeFi saves a large number of intermediate links and labor costs in the traditional financial system, making lending interest spreads smaller and transaction fees lower, making it beneficial to participants.
2. Improve service efficiency: The DeFi protocol operates continuously around the clock (24/7), and transaction settlement is completed almost instantly, completely getting rid of the fixed business hours of traditional banks and the long wait for cross-border transfers.
3. Enhance financial inclusion: DeFi provides an attractive alternative for those who do not have access to traditional banking services. It breaks the limitations of region and identity, allowing more people to enjoy modern financial services.
4. Inspire financial innovation: The open source and composable characteristics of DeFi have given birth to the "Cambrian explosion" of financial innovation. Developers can quickly build and deploy new financial applications, and market competition drives products iterate and optimize at an astonishing speed.
3. Can DeFi replace traditional banking services?
1. Great potential: In theory, DeFi has been able to replicate most of the core functions of traditional banks, such as deposits, lending, transactions and asset synthesis. As the technology matures, its advantages in efficiency, cost and transparency will become increasingly obvious.
2. Facing challenges: DeFi is still in its early stages of development and faces multiple challenges such as technical security risks (such as smart contract vulnerabilities), complex user experience, scalability bottlenecks, and unclear regulatory policies. These factors limit their large-scale popularization.
3. Future Outlook: In the short term, it is unlikely that DeFi will completely replace traditional banking services. The more likely scenario is "fusion and coexistence" . DeFi will serve as a powerful complement to promote reforms in traditional financial institutions to make them more efficient, transparent and user-centric. In the future, we may see a hybrid model combining traditional finance and decentralized finance to jointly build a more diverse and open global financial ecosystem.
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