What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is an emerging financial system built on blockchain technology, with the core goal of providing financial services without the involvement of traditional centralized institutions such as banks and brokerages. DeFi utilizes smart contracts to automatically execute transactions and agreements, achieving decentralization, openness, permissionlessness, automation, and high transparency in financial activities. Through DeFi protocols, users can directly control their funds instead of entrusting them to third parties.
Core Financial Services Offered by DeFi
The DeFi ecosystem encompasses many functions of traditional finance and innovates upon them, primarily including:
- Lending: Users can borrow or lend crypto assets without intermediaries, typically secured by over-collateralization.
- Decentralized Exchanges (DEX): Allow users to trade cryptocurrencies directly on-chain, without the matching services of a centralized exchange, such as Uniswap and Curve Finance.
- Yield Farming: Users earn trading fees or protocol token rewards by providing liquidity to DeFi protocols.
- Staking: Participating in the validation process of Proof-of-Stake (PoS) networks, or locking assets in a protocol to earn returns, such as the liquid staking services provided by Lido.
- Stablecoin Issuance: Issuing cryptocurrencies pegged to fiat currencies like the US dollar through mechanisms such as algorithms, over-collateralization, or fiat reserves, e.g., Dai issued by MakerDAO.
- Prediction Markets and Insurance: Allow users to bet on the outcome of future events or provide insurance against potential risks within DeFi protocols.
DeFi Ecosystem Development and Latest Trends
The DeFi sector is experiencing rapid development and innovation, continuously expanding its application boundaries:
- Layer-2 Solution Integration: As of September 2026, over 60% of DeFi platforms have integrated Layer-2 solutions, aiming to increase transaction speed, reduce transaction costs, and enhance scalability.
- Real-World Asset (RWA) Tokenization: Tokenizing traditional assets such as real estate, bonds, and commodities, bringing them into the blockchain world to enhance liquidity and composability. Morgan Stanley predicts that the scale of tokenized real-world assets is expected to grow from approximately $40 billion currently to $2.3 trillion by 2030. Currently, tokenized interest rate funds are nearing $15 billion in size.
- New Area Exploration: The DeFi ecosystem is actively expanding into new areas such as prediction markets, payments, and integration with Artificial Intelligence (AI) agents.
- Institutionalization Process: In October 2026, Aave Labs proposed establishing a non-member Cayman Islands Aave Foundation, aiming to provide a legal framework for the protocol's physical operations and governance. Additionally, crypto asset management firm 21Shares applied to the U.S. Securities and Exchange Commission (SEC) in October 2025 to issue an ETF tracking the price of Hyperliquid's native token HYPE, demonstrating traditional financial institutions' interest in DeFi assets.
DeFi Market Size and Key Data
The Total Value Locked (TVL) and user participation in the DeFi market have shown significant growth over the past few years:
- Total Value Locked (TVL): A key metric measuring the total value of assets deposited in DeFi protocols. In October 2020, TVL first exceeded $11 billion; by the end of August 2021, this figure had surpassed $150 billion. By the end of 2024, the DeFi sector's TVL exceeded $100 billion, reaching $237 billion in Q3 2025. As of October 3, 2026, the TVL of the well-known lending protocol Aave V3 was approximately $18.1 billion.
- Market Size: By the end of June 2021, the DeFi market size was below $48 billion.
- Market Segmentation: As of September 2026, the DeFi market is primarily composed of lending platforms (40%), decentralized exchanges (30%), stablecoins (15%), prediction markets (10%), and Wallets (5%).
- Stablecoin Data: The average monthly payment transaction volume for stablecoins has reached $70 billion. Among them, USDe's market capitalization has exceeded $1.35 billion.
- Protocol Fees: Layer 1 blockchains like Solana and Ethereum generate over $100 million in annual fees, while the Hyperliquid protocol's annualized fees are close to $1 billion.
Major Risks and Challenges Facing DeFi
While DeFi offers numerous innovative opportunities, it also comes with unique risks and challenges:
- Security Risks: Smart contract vulnerabilities are the primary security threat in DeFi. Attackers can exploit code flaws for flash loan attacks, oracle manipulation, and more. According to statistics, over 150 smart contract attack incidents occurred in the DeFi sector in 2024, resulting in losses exceeding $328 million; in 2023, attackers stole $1.1 billion from DeFi protocols. Additionally, composability risks between protocols can lead to cascading failures.
- Lack of Insurance: Unlike traditional financial institutions, DeFi platforms typically do not provide official insurance or protection for user funds. In the event of a security incident, user assets may face permanent loss.
- Compliance and Regulatory Risks: DeFi's decentralization, anonymity, and cross-border transaction characteristics make it difficult for regulators to supervise and enforce, making it susceptible to illicit activities such as money laundering. Users who interact with problematic funds or sanctioned addresses may face legal consequences. Central banks and financial regulators in many countries and regions are still exploring how to effectively regulate this emerging sector, and regulatory frameworks are still being formed.
Regulatory Bodies and Industry Perspectives
The rapid development of DeFi has attracted widespread attention from global regulatory bodies and industry participants:
- Regulatory Bodies: The U.S. Commodity Futures Trading Commission (CFTC) urges government and industry to prioritize understanding and regulating DeFi. The U.S. Securities and Exchange Commission (SEC) may apply federal securities laws based on the characteristics of crypto assets and transactions, and may take action against yield-generating activities and Decentralized Autonomous Organizations (DAOs) in DeFi. The SEC also builds operational frameworks for institutional participation through exemptions and guidelines. Currently, many central banks and financial regulators in various countries and regions have not yet formulated clear legal provisions for DeFi, and regulatory frameworks are still being formed.
- Industry Perspectives: Morgan Stanley believes that the digital asset industry is shifting from pure speculation to building financial infrastructure, and that public blockchains and traditional financial institutions will coexist, forming a "convergence" trend. They predict that tokenization will significantly enhance the liquidity and utility of traditional assets, while stablecoins are seen as the cash backbone of digital markets. Binance co-founder Changpeng Zhao once pointed out that AI agent developers should focus more on creating truly useful products rather than overly concentrating on token issuance, believing that the vast majority of AI agents do not need tokens.
