Decentralised Finance (DeFi): Opportunities and Risks What is DeFi?

Decentralised Finance (DeFi) is a blockchain-based financial system that allows users to save, lend, invest, and transact without traditional banks. It uses smart contracts, decentralised applications (DApps), and peer-to-peer networks. DeFi is rooted in Bitcoin’s decentralised philosophy and grew with Ethereum and DAOs.

How it Works

Users only need a crypto wallet – no need for KYC (Know Your Customer) or identity verification. Services include decentralised exchanges, lending, remittances, and insurance. Governance is done by token holders in DAOs, not by central authorities.

Benefits of DeFi

DeFi aims to democratise finance by removing intermediaries. It offers financial services to anyone with internet access, making it useful for people without bank accounts. Other advantages include low transaction costs, transparency (all actions are recorded on public ledgers), speed, and innovation in financial tools like stablecoins. 

Risks and Concerns

DeFi’s biggest strength – anonymity – is also its biggest risk. Since no identity verification is needed, DeFi can be misused for money laundering, fraud, and terror financing. Criminals and terrorists can hide their identities, move money across borders, and use different wallets to avoid detection. Reports from the FATF, UK, and EU highlight these growing threats.

India’s Position

India ranks third in global DeFi use but lacks updated risk assessments. Experts suggest India must adopt strong, tech-based rules to prevent misuse, rather than banning DeFi.

Conclusion

While DeFi has great potential for financial inclusion and innovation, its risks are serious. A balanced approach—embracing the technology while strengthening regulations—is the need of the hour to protect national and global security.