DeFi vs traditional finance: can decentralised finance disrupt banking?

Imagine a financial system where the reins are in the hands of the individuals. This is the vision of decentralised finance (DeFi), an emerging technology poised to disrupt the traditional finance sector. This blog compares DeFi with traditional finance, sets out the main risks, and explains how banks are adopting parts of the technology.

What is decentralised finance (DeFi)?

Decentralised finance (DeFi) is a set of financial services, such as lending, borrowing, trading and payments, that run on public blockchains through self-executing programs instead of through banks, brokers or exchanges. Unlike traditional finance, which relies on centralised institutions like banks and intermediaries, DeFi operates autonomously through smart contracts, eliminating intermediaries from the equation and facilitating peer-to-peer transactions. This decentralised approach not only enhances accessibility but also promotes financial inclusion, enabling individuals worldwide to access digital finance services without geographic or socioeconomic barriers, provided they have internet access and a digital wallet.

Moreover, since DeFi platforms operate 24/7, they also offer uninterrupted access to financial services, unlike traditional markets constrained by business hours and geographical boundaries.

DeFi vs traditional finance: What is the difference?

The difference between decentralised finance and traditional finance comes down to who holds the assets, who runs the process and who carries the risk. Traditional finance (TradFi) works through regulated intermediaries that hold customer funds and answer to supervisors. DeFi replaces those intermediaries with code, so users keep control of their assets but also take on risks that a bank would normally manage. Here is how the two compare:

Advantages of decentralised finance

Permissionless lending, borrowing and trading

One of the key advantages of DeFi lies in its ability to offer a diverse range of 'permissionless' digital finance services, including lending, borrowing, trading and asset management, all within a decentralised ecosystem. Through decentralised lending protocols, individuals can lend or borrow digital assets without the need for intermediaries, thereby reducing transaction costs and increasing efficiency. Furthermore, DeFi platforms enable users to trade digital assets seamlessly, providing liquidity and fostering a vibrant ecosystem of decentralised exchanges.

Yield farming

With innovations such as 'yield farming', DeFi has also enabled users to earn returns by using cryptocurrencies in various ways, such as lending, borrowing and staking. Imagine it as investing cash to earn interest in a bank, but with digital assets like tokens, and often with higher potential returns, which come with higher risk. In yield farming, you might lend your tokens to receive interest payments or provide liquidity (using your tokens to help facilitate trading between different cryptocurrencies) and earn fees from these trades. This has attracted substantial attention from investors looking for alternative investment avenues beyond the typical financial products.

Synthetic assets

Another significant aspect of DeFi is the creation of 'synthetic assets', which are blockchain-based assets representing real-world assets like currencies, commodities or stocks. DeFi platforms enable users to trade these assets without holding the actual physical or traditional assets, thus providing exposure to various markets without some of the traditional barriers to entry.

Transparency on a public ledger

DeFi's reliance on blockchain technology underpins its other advantage, which is its potential to enhance transparency in financial transactions. Each transaction made on a blockchain is permanently logged on a public ledger, which is accessible and verifiable by all. This makes activity easier to audit, although transparency alone does not protect users from coding errors, hacks or scams, which are covered below.

Risks of decentralised finance

However, despite the many advantages of DeFi, it does not come without challenges. Security vulnerabilities, complex user interfaces and the inherent volatility of cryptocurrencies are some of the leading challenges. The absence of a central authority means that users must be more proactive in managing their investments and understanding the risks involved, including smart contract vulnerabilities and market volatility.

The Financial Stability Board (FSB) found that DeFi performs largely the same functions as traditional finance and is exposed to the same vulnerabilities, including leverage, liquidity mismatches and operational fragility, while the volatility of crypto-assets can magnify them. The main risks of decentralised finance include:

• Smart contract and security risk: coding errors, compromised cross-chain bridges and manipulated price feeds (oracles) can drain funds, and blockchain transactions are hard to reverse.
• Market and liquidity risk: loans are usually backed by volatile crypto-assets, so a sharp price fall can trigger automatic liquidations across connected protocols.
• Governance risk: many protocols are less decentralised than they appear, with control concentrated among developers or large token holders.
• Financial crime risk: open access and pseudonymous wallets make DeFi attractive for money laundering and sanctions evasion.

How is DeFi regulated?

Regulators increasingly apply the principle of "same activity, same risk, same regulatory outcome" to DeFi. The International Organization of Securities Commissions (IOSCO) published nine policy recommendations for DeFi in December 2023 on that basis. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) has applied to crypto-asset service providers since 30 December 2024, although services provided in a fully decentralised way sit outside its scope. In practice, this means rules focus on the firms that give users access to DeFi, such as exchanges, wallet providers and stablecoin issuers.

What is the future of decentralised finance?

Looking ahead, the integration of DeFi with other emerging technologies like artificial intelligence and machine learning could lead to even more innovative digital finance services and improvements in financial risk assessments. For instance, predictive analytics could be used to better assess loan risks based on non-traditional data sets, thus further democratising access to finance.

For businesses and consumers alike, embracing DeFi could mean a shift towards more personalised and immediate financial services. Imagine a world where, instead of going through lengthy and bureaucratic processes to get a loan, one can simply connect to a DeFi platform, lock up digital assets as collateral and receive funds within minutes. This level of efficiency and direct control over financial dealings is what sets DeFi apart from traditional finance. In fact, given its benefits, traditional financial institutions are now exploring how to integrate DeFi into their existing offerings. Collaboration between DeFi innovators and established financial players could pave the way for a more inclusive and efficient financial system.

How are banks engaging with DeFi?

Decentralised banking, where deposits, loans and payments run on blockchain protocols rather than on a bank's own ledger, is still a small part of the market. Most banks are not moving customers onto public DeFi protocols. Instead, they are adopting DeFi's building blocks, such as tokenisation, smart contracts and programmable settlement, inside regulated and permissioned environments. This approach is often called institutional DeFi. Current activity includes:

• Tokenised deposits and settlement: Project Agórá, convened by the Bank for International Settlements (BIS) with seven central banks and more than 40 private financial institutions, reported in 2026 that tokenised commercial bank deposits and tokenised central bank reserves can settle cross-border payments on a shared programmable platform. The project is now moving to real-value testing.
• Regulated stablecoins: the US GENIUS Act, signed into law in July 2025, allows subsidiaries of insured banks, among other approved issuers, to issue payment stablecoins backed one to one by reserves.
• Tokenised assets: banks and asset managers are issuing bonds, funds and other real-world assets as digital tokens that can settle and move around the clock.

Conclusion

Decentralised finance is not just a temporary phenomenon but a formidable development in the financial sector that holds the promise of reshaping global finance. While there are risks and challenges to be navigated, the opportunities DeFi offers are truly transformative. For banks and financial institutions, the question is no longer whether DeFi matters, but which of its building blocks to adopt and under what controls.

How can Infosys BPM help?

Infosys BPM helps banks and financial institutions put the right controls around digital assets and DeFi-linked activity. Its financial crime compliance services cover know your customer (KYC) operations, anti-money laundering (AML) operations and fraud management, backed by more than 20 years of financial crime compliance experience and 50+ global clients. Infosys BPM is also recognised as a Leader in the Everest Group Financial Crime and Compliance (FCC) Operations Services PEAK Matrix® Assessment 2025.