Decentralized finance, commonly known as DeFi, refers to the use of distributed ledger technologies—such as blockchain—to deliver financial services without reliance on traditional intermediaries. Spearheaded by the World Economic Forum’s Global Future Council on Decentralized Finance, efforts are underway to establish a clear, globally consistent definition to support regulatory alignment and technological integration.
The council, composed of 20 international experts from academia, industry, and government, has defined DeFi through five core attributes. First, it operates on a digitally native and immutable record system, typically using tokenized assets recorded on decentralized ledgers. Second, it enables the exchange of value between participants. Third, transactions are processed through peer-to-peer networks, eliminating the need for banks or clearinghouses. Fourth, its architecture is programmable, open, and composable, meaning applications can be built atop one another using smart contracts—self-executing code that automates financial agreements. Fifth, users have the option to maintain self-custody of their assets via digital wallets, rather than relying on centralized institutions.
These characteristics distinguish DeFi from conventional financial systems, which depend on centralized entities for custody, settlement, and verification. In contrast, DeFi platforms allow direct interaction between users, reducing transaction costs and enabling near-instant settlements.
Current use cases include lending and borrowing, where individuals contribute assets to liquidity pools and earn interest, or borrow against collateral. Decentralized exchanges facilitate asset swaps using automated market makers that adjust prices algorithmically. Additionally, yield farming and staking allow users to generate passive income—either by supplying liquidity or by validating transactions on a blockchain network.
Despite its potential, DeFi faces significant challenges. Regulatory frameworks remain underdeveloped in most jurisdictions, creating uncertainty for users and developers. Cybersecurity vulnerabilities, particularly in smart contract code, pose risks of exploitation. Financial stability concerns also exist, as the speed and autonomy of transactions can mimic conditions similar to bank runs, making risk management difficult.
Standardized definitions and global cooperation are essential for DeFi’s long-term viability. Just as traditional finance relies on frameworks like the Basel Accords and International Financial Reporting Standards, a unified approach to digital finance can enable cross-border compatibility and regulatory efficiency. Clear terminology reduces legal ambiguity and allows compliance rules to be embedded directly into smart contracts.
The Global Future Council aims for its definition to serve as a foundation for policymakers and technologists as legacy financial systems undergo digital transformation. By fostering a shared understanding, stakeholders can collaboratively shape a secure, inclusive, and interoperable financial ecosystem.
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What is ‘decentralized finance’ and what can it actually do?
Financial and Monetary Systems
What is ‘decentralized finance’ and what can it do in practice?
Oct 20, 2025
A definition of decentralized finance will help its adoption Image: REUTERS/Jose Cabezas
Sandra Waliczek
Blockchain and Digital Assets , World Economic Forum
Harry Yeung
Specialist, Financial Markets and Resilience , World Economic Forum
This article is part of: Annual Meetings of the Global Future Councils and Cybersecurity
Defining “decentralized finance” is critical for its global adoption.
Several core features distinguish decentralized finance from traditional finance.
The Global Future Council on Decentralized Finance is working to establish a common understanding and standards for decentralized finance.
Decentralized finance, sometimes abbreviated as DeFi, is the application of distributed ledger technology to financial services. It has the potential to transform the global financial system, offering various benefits: transparency, accessibility, lower transaction costs and near-instant settlement.
As blockchains and decentralized applications proliferate, experts agree that the long-term success of decentralized finance depends on establishing global standards to ensure interoperability, both among different blockchains and with the traditional financial ecosystem.
However, ongoing debates between the public and private sectors over decentralized finance’s precise definition have hindered progress towards a unified set of standards.
The World Economic Forum’s Global Future Council on Decentralized Finance has developed a definition to help stakeholders transition their systems as needed, as financial services undergo digital transformation.
What is the Global Future Council on Decentralized Finance?
The Global Future Council on Decentralized Finance is a time-bound think tank comprising 20 leading experts from around the world. It brings together academics, senior industry executives and public sector officials from six continents.
Over two years, members meet monthly to deliver a range of outputs, guided by the central question: How can we understand the trajectory of decentralized finance’s potential within the broader financial ecosystem?
The council has already collaborated with the World Economic Forum’s Strategic Intelligence team to develop this transformation map – a curated database of reputable articles and resources on the most pressing issues impacting the discipline.
In addition, the council has produced a robust definition of decentralized finance, aiming to foster a common understanding among private and public sector stakeholders as they collaborate to develop globally consistent regulations.
Defining decentralized finance
The council defines decentralized finance as follows:
Decentralized finance is the application of decentralized technology to financial services, aspiring to provide solutions to and potentially beyond existing financial services, and characterized by:
Digitally native, immutable system of record
Exchange of value
Peer-to-peer network for operation and settlement
Programmable, open and composable architecture
Option for self-hosted custody
Let’s break down these characteristics:
Digitally native, immutable system of record: Decentralized finance utilizes digital or tokenized assets, with records on distributed digital ledgers as opposed to traditional cash-based systems. This does not exclusively mean “blockchain” as other forms of distributed ledger technology also exist.
Exchange of value: Only assets with inherent worth can be traded on decentralized finance platforms.
Peer-to-peer network for operation and settlement: Whereas intermediaries are common in traditional finance – e.g. clearinghouses, custodians and banks – to facilitate transactions, in decentralized finance, digital wallets connect directly, enabling value transfer without intermediaries.
Programmable, open and composable architecture: Decentralized finance platforms use smart contracts – self-executing agreements that process transactions automatically, subject to validator approval. Their open-source design enables composability, allowing new applications to be built upon existing ones.
Option for self-hosted custody: Unlike traditional finance, where banks hold custody of users’ assets, decentralized finance enables users to self-custody their assets via digital wallets, while also allowing the option to use centralized exchanges.
Current applications and challenges
Decentralized finance is an ever-growing landscape of applications, each of which serves different purposes and provides different services to users. Some of its most common use cases include:
Lending and borrowing: Users can lend digital assets to a lending pool and earn interest. Others can borrow these assets after pledging other assets as collateral.
Trading: Through decentralized exchanges, users can swap one digital asset for another. Automated market makers automatically adjust the prices of these assets in their liquidity pool using smart contracts.
Yield farming and staking: Users can earn passive income through these methods. Yield farming is the broad term describing when users lend digital assets to a liquidity or lending pool in exchange for rewards, often in governance tokens. Staking involves pledging digital assets to validate transactions on a blockchain, earning users rewards.
However, decentralized finance still faces various risks:
Lack of regulations: Given that decentralized finance is a relatively new technology application, much of the world lacks regulations specific to it.
Cybersecurity risks: Smart contract risks can arise from potential errors in the code base.
Financial risks: The decentralized nature can create challenges similar to a bank run. Transactions occur so quickly that it can be challenging to ensure that sufficient risk measures are in place.
Passing laws that uphold global standards would protect consumers and increase trust in decentralized finance worldwide.
Why defining decentralized finance matters
Traditional finance relies on global standards frameworks, such as the International Financial Reporting Standards and the Basel Accords, to create an integrated and efficient system. These frameworks enable national regulators to tailor rules to local contexts while supporting seamless cross-border interaction.
Similarly, clear definitions for decentralized finance are essential for aligning digital asset regulations worldwide. Shared terminology makes cross-border transactions easier to navigate and reduces the administrative burden of interpreting foreign rules.
With standardized language, compliance mechanisms can be embedded directly into smart contracts, improving the efficiency and reliability of global financial transactions.
The Global Future Council on Decentralized Finance hopes this definition will help unite regulators and developers worldwide as the traditional financial system undergoes digital transformation.
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