Decentralized finance (DeFi) is an emerging way to deliver financial services on open blockchain networks, reducing reliance on closed, institution-run systems. DeFi reached a milestone in Q3 2025 with a total value locked of $237 billion. The shift comes with advantages such as speed, reach, and transparency, as well as challenges, including important technical and compliance risks.

Below, we discuss the fundamentals of decentralized finance, the mechanics behind DeFi applications and smart contracts, the benefits for users and institutions, and the potential challenges that limit adoption today.

What’s in this article?

• What is decentralized finance?
  
• How do decentralized applications deliver financial services?
  
• What role do smart contracts play in DeFi operations?
  
• What are the benefits of decentralized finance?
  
• What risks and compliance challenges limit DeFi adoption?
  
• How should businesses evaluate decentralized finance platforms?
  
• How Stripe Payments can help
  

What is decentralized finance?

Decentralized finance (often known as DeFi) runs on public blockchain networks and is a way to deliver familiar financial services without relying on banks or brokers. Instead of applying for a loan from a bank, for example, you might borrow directly from a pool of funds contributed by other users. The terms, interest rates, and repayments are handled automatically by code, not people.

How do decentralized applications deliver financial services?

Decentralized applications (dApps) look like regular web or mobile apps. But instead of connecting to a bank’s servers, they connect your crypto wallet directly to smart contracts running on a blockchain network. The contracts handle the actual financial logic, and the dApp provides a clear way for you to interact with them.

Here’s what that looks like in practice:

• You visit a lending dApp and connect your wallet. The wallet verifies your identity and shows your account balance.

• When you choose to deposit funds, the dApp passes your request to the lending contract on the blockchain.

• The smart contract records your deposit, updates how much you’re owed, and makes the funds available to borrowers in the system.

• The blockchain processes the transaction and updates the shared ledger, typically within seconds.

What role do smart contracts play in DeFi operations?

Smart contracts are the small programs on the blockchain that run exactly as written. They handle everything from custody to calculation.

Here’s what they facilitate:

• Automated execution: Smart contracts carry out financial logic the moment conditions are met. They issue loans, process trades, update balances, calculate interest, and enforce repayment.

• Trust through code: Participants rely on the contract to execute the agreement as written: the program controls the funds and the rules, which removes the need for trust in any intermediary.

• Transparent rules: The code is typically public and verifiable onchain: anyone can review how a contract is designed, how funds move through it, and what the protocol will do in any given situation.

• Programmability: Developers can stack and link contracts to build more complex products. A yield strategy might route deposits through multiple lending pools, and a synthetic asset might pull price data, collateral logic, and payout conditions from multiple contracts.

• Automated risk management: Contracts can monitor collateral value and immediately activate liquidations. They don’t wait for a committee or manual review, which helps keep the system solvent even in volatile markets.

• Noncustodial control: Funds are held with the contract only as needed for the transaction. Users retain control through their wallets, and the contract’s behavior with their assets is strictly defined by code.

What are the benefits of decentralized finance?

DeFi expands what’s possible in digital financial services by providing users and businesses with tools that operate around the clock, worldwide, and without dependence on local banking infrastructure. Its strength lies in accessibility, speed, flexibility, and the ability to construct new financial strategies.

These are the benefits:

• Broader financial access: More than a billion adults globally lack bank accounts, and DeFi gives anyone with a phone a way to store value, transact, and participate in markets. DeFi lowers the threshold for entry by removing brand requirements, account minimums, or credit checks.

• Fast cross-border movement of money: Transfers through public blockchains can settle quickly and predictably, which makes it easier for businesses and individuals to move funds across regions without waiting for traditional clearing systems.

• Flexibility for businesses: Digital dollars can shift between different uses, such as payments, treasury, or short-term allocation, without waiting for bank hours. This flexibility enables companies to integrate DeFi with traditional payment networks. It’s one reason why Stripe now supports stablecoin-based financial accounts.

• Potential cost efficiency: In favorable network conditions, transactions might incur lower service fees because funds move directly through software rather than through layers of intermediaries. Costs are visible and upfront, and pricing is generally uniform where you are.

• Yield opportunities: Lending pools and liquidity markets provide avenues for returns that might exceed traditional cash products in certain conditions. These opportunities have drawn interest from both individual savers and corporate treasury teams looking to diversify.

What risks and compliance challenges limit DeFi adoption?

Despite its promise, DeFi introduces risks that stem from its openness, reliance on code, and broad reach. These challenges can slow institutional participation and require careful management from any organization that interacts within the ecosystem.

These are the issues that slow broader adoption:

• Regulatory and jurisdictional uncertainty: Many governments are still deciding how DeFi fits into existing financial rules. In the US, for example, multiple regulators claim partial jurisdiction, but none provide a unified regulatory framework. Governments in some countries, such as Singapore, encourage experimentation, while others, such as China, restrict or ban certain DeFi activities.

• Identity, Anti-Money Laundering (AML), and sanctions exposure: DeFi protocols typically don’t run identity checks or monitor transactions, so institutions must find their own way to satisfy AML or Know Your Customer (KYC) rules. Exposure to tainted funds or sanctioned addresses can result in legal and reputational consequences.

• Technical vulnerability in smart contracts: Bugs, design flaws, and integration errors can be exploited. In 2023 alone, attackers stole $1.1 billion from DeFi protocols. Even audited systems have suffered losses, which shows the need for ongoing scrutiny.

• User risk: DeFi shifts responsibility from institutions to individuals. The user must manage private keys, approve transactions, and guard against phishing attacks. If you lose a recovery phrase, mistakenly sign a transaction, or have your wallet compromised, funds can be instantly wiped out.

• Asset and market instability: Typically, DeFi activity relies on crypto assets that can swing sharply in value. The volatility affects collateralized loans, liquidity pools, and yield strategies. Even stablecoins can face stress if confidence or collateral quality erodes.

• Limited recourse and customer protections: If a protocol fails or funds are exploited, users typically absorb the full loss. It’s a contrast to traditional finance, where layers of customer protection soften the impact of errors or malicious activity.

• Network congestion and variable fees: At peak usage, some blockchains experience congestion that leads to higher costs and slower settlement. While scaling solutions continue to improve performance, reliability still varies by network and time of day.

How should businesses evaluate decentralized finance platforms?

In DeFi, the “vendor” is often code, which makes diligence even more important.

Here’s where to focus:

• Read independent audits from reputable firms. An audit doesn’t eliminate risk, but it shows the team takes security seriously. Check whether the code is open-source, whether the protocol runs a bug bounty program, and if it has responded quickly to issues in the past.

• Understand who can change the system: Some protocols are controlled by a team, others by token holders, and others by a foundation. If contracts are upgradeable, ask who holds the upgrade keys and what safeguards are in place. Concentrated authority or opaque governance can introduce hidden risk.

• Map the protocol’s design to your regulatory obligations: If you must meet AML or KYC requirements, you’ll need to understand where those responsibilities fall. Watch for any known sanctions exposure or enforcement actions that involve the protocol or similar ones.

• Evaluate how you’d interact with the platform: Does it support multiple wallets or institutional custody providers? Can you implement proper access controls and internal approval flows? Test with small amounts to see how the system behaves.

• Begin with limited exposure: Expand only as your comfort and competency grow. Treat early use as a pilot and spread risk across multiple platforms rather than concentrating it in one.

How Stripe Payments can help

Stripe Payments provides a unified, global payments 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 balance.

Stripe Payments can help you:

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

• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.

• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.

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