Decentralized finance (DeFi) turns core financial actions, such as lending, trading, payments, and liquidity management, into software that anyone with a crypto wallet can access. The result is a global, programmable financial layer that operates constantly and creates new opportunities for businesses. Below, we’ll discuss how DeFi works, what it can offer businesses, and the challenges that come with using it.

What’s in this article?

• What is decentralized finance in crypto?
  
• How do crypto assets power decentralized financial products?
  
• What mechanisms sustain liquidity in DeFi markets?
  
• What benefits do decentralized financial models offer?
  
• What are the risks of DeFi in crypto?
  
• How can businesses evaluate DeFi opportunities?
  
• How Stripe Payments can help
  

What is decentralized finance in crypto?

Decentralized finance is a financial system built on public blockchains rather than banks or brokers. It uses smart contracts (i.e., preprogrammed code that runs automatically when certain conditions are met) to handle crypto transactions directly between users. That means lending, trading, borrowing, or earning interest can happen without requiring a traditional intermediary to hold funds or approve access. In addition, anyone with an internet connection and a crypto wallet can participate in DeFi.

What makes DeFi different from traditional finance is that trust is distributed: instead of relying on institutions to safeguard money and enforce rules, users depend on verifiable code and shared networks. DeFi’s total market value surged past $180 billion at its 2021 peak before it contracted alongside broader crypto markets. But even with that volatility, its growth has proven that financial infrastructure can operate with less centralized control.

How do crypto assets power decentralized financial products?

Crypto assets are the working capital of DeFi. They include native coins such as Ether and Bitcoin, which belong to their own blockchains, as well as tokens, which are assets issued on top of existing chains. Every action in DeFi (e.g., trading, lending, borrowing, payments, governance) runs on some mix of these assets.

When someone trades on a decentralized exchange or lends through a protocol, they’re doing so with tokens. Many protocols issue governance tokens that give users a say in how the system develops. These tokens might grant voting rights, fee participation, or influence over risk settings.

DeFi depends on users locking up tokens to keep markets functioning. Borrowers post crypto as collateral (typically more than the loan amount) to protect the system from price swings. Traders rely on liquidity pools filled with user deposits, which make instant swaps possible. This pooled collateral and liquidity support decentralized lending and trading at scale.

Because crypto can be volatile, stablecoins pegged to assets such as the US dollar serve as the primary unit of account and settlement currency across DeFi markets. Stablecoins such as USD Coin (USDC), Tether (USDT), and Dai (DAI) give borrowers more predictable debt and allow lenders to earn relatively stable returns.

What mechanisms sustain liquidity in DeFi markets?

DeFi stays liquid without banks or market makers because its infrastructure is built from incentives and automated systems. These mechanisms keep trading, lending, and borrowing running.

Decentralized lending pools

Lending protocols operate as global pools where anyone can deposit assets to earn interest or post collateral to borrow. Loans are typically overcollateralized to protect the protocol from volatility, and smart contracts handle liquidations automatically if collateral falls below required thresholds. Interest rates update in real time based on supply and demand. When lots of people borrow a particular asset, the rate rises to attract more deposits.

Automated market makers (AMMs)

Decentralized exchanges use algorithms called AMMs to set prices based on the ratio of tokens in a pool. Users deposit those tokens to create the liquidity that traders rely on. When someone swaps one asset for another, the AMM recalculates the price and updates the pool automatically. Liquidity providers earn a cut of every trade, which is what motivates them to lock up capital. The model works even for assets that are less traded, although providers take on risks such as impermanent loss when prices move sharply.

Yield incentives

Many protocols reward people who supply liquidity or lend assets with an additional stream of tokens on top of trading fees or interest. This yield-farming model helped early DeFi platforms scale quickly and remains a common way to attract capital. The rewards deepen the liquidity pools that the DeFi markets depend on.

What benefits do decentralized financial models offer?

Decentralized finance offers practical advantages such as reach, capital efficiency, speed, and access to several financial tools. Here’s a closer look:

• Borderless market access: DeFi lets users participate in financial activity that isn’t tethered to their local banking systems. A company in a country with tight capital controls or limited correspondent banking can still access global liquidity through a crypto wallet.

• Continuous access to liquidity: DeFi operates on a global network that doesn’t close, pause for settlement, or depend on a single institution’s uptime.

• Programmable financial workflows: Because DeFi runs on smart contracts, businesses can build routines (e.g., automated payments, collateral management, revenue sharing arrangements) that are triggered based on real-time conditions.

• Capital that can shift quickly: In traditional finance, shifting collateral or adjusting positions can take time and coordination. In DeFi, assets can be staked or lent again, or swapped within minutes.

• Yield shaped by real-time demand: DeFi lending rates update algorithmically based on the supply and demand of each asset. It’s a dynamic environment where users can choose risk and return profiles based on transparent on-chain data rather than opaque institutional pricing.

• Transparent risk signals: DeFi keeps many system metrics visible, such as collateral ratios, liquidation thresholds, interest curves, and protocol balances. Having this level of insight makes it easier to evaluate exposure.

What are the risks of DeFi in crypto?

DeFi’s advantages come with real risks that businesses and institutions should consider when they approach the crypto space. Be aware of the following:

• Unclear regulatory boundaries: DeFi doesn’t correspond neatly with existing financial rules. Regulators in many countries are still deciding whether DeFi counts as a securities activity, a money transmission activity, or something else entirely. That ambiguity creates exposure for businesses, especially if a transaction involves users in multiple jurisdictions.

• Anti-Money Laundering (AML) and sanctions concerns: Many DeFi protocols don’t require identity checks, which raises questions about how they fit into AML and sanctions frameworks. Regulators are already taking action when they believe illicit activity has occurred on decentralized platforms.

• Smart contract vulnerabilities: Smart contracts are often immutable so a bug discovered after deployment can expose funds immediately. Billions of dollars have been lost to exploits, from logic errors in lending protocols to flaws in liquidity pool mechanics. Even audited protocols have suffered attacks, which shows how challenging it is to secure open, composable financial code at scale.

• Oracle manipulation: Many protocols rely on external info feeds known as oracles. If those feeds are manipulated—even temporarily—protocols can behave in unintended ways. Attackers can trick protocols into executing undercollateralized loans or mispriced swaps.

• Lack of consumer protections: Traditional finance has backstops such as deposit insurance, fraud claims, and customer support teams. DeFi generally doesn’t. If a user sends funds to the wrong address or interacts with a malicious contract, the loss is usually permanent. And because users hold their own keys, losing access to a wallet means losing access to the assets.

• Market volatility and liquidity crunches: Crypto markets move quickly and DeFi responds instantly. Price drops can drain liquidity pools as users rush to exit positions. Stablecoins add their own risk because some maintain their pegs reliably, while others have collapsed outright.

• Governance risks: Protocols governed by token holders can be captured by groups with enough voting power. If someone accumulates a majority stake, whether through coordinated buying or an exploit, they can push through harmful changes, including proposals that redirect treasury funds.

How can businesses evaluate DeFi opportunities?

DeFi can open useful new channels for payments, liquidity, and financial automation for businesses. Here are the steps to assessing your opportunities.

Build internal understanding

Before experimenting with DeFi in the crypto space, you need to understand how assets move, how lending protocols manage risk, and how stablecoins behave under stress.

Start with specific use cases

Productive entry points should be specific: cross-border payouts, stablecoin-based treasury flows, or access to global liquidity during off-hours. Stripe supports these use cases through tools that let businesses send stablecoin payouts without operating their own crypto infrastructure.

Run a pilot with guardrails

Small, limited-time pilots help teams understand the impacts without taking on outsize risk. You can test stablecoin settlements with a subset of vendors or explore yield on a tiny portion of treasury balances, measuring cost, speed, accounting friction, and security.

Prioritize risk assessments

Evaluate DeFi platforms the same way you’d evaluate a financial counterparty. Security audits, economic design, liquidity depth, governance structure, and incident history all matter. Custody, key management, and compliance processes are just as important.

Stay adaptive

DeFi changes quickly: regulations change, protocols mature or disappear, and new tools can make earlier ones obsolete. Monitoring these shifts and revisiting your assumptions regularly will put you in a better position to deepen or scale your involvement.

How Stripe Payments can help

Stripe Payments provides a unified, global payment solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world. Businesses can accept stablecoin payments from almost anywhere in the world that settle as fiat in their Stripe balances.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs and access to 125+ payment methods, including stablecoins and crypto.

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Learn more about how Stripe Payments can power your online and in-person payments, or get started today.