Decentralized Finance (DeFi): Benefits, Risks, and RiskMitigation Strategies

Abstract

The 2008-2009 global financial crisis resulted in a loss of trust in traditional financial systems and the need to decentralize and democratize finance. This coincided with the birth of blockchain technology, marked by creating the pioneer cryptocurrency, bitcoin (BTC), in 2009. As blockchain technology has gained prominence, decentralized finance (DeFi) has emerged, transforming the financial landscape and offering financial services without the need for traditional financial intermediaries. While the disruption of traditional finance has opened up new opportunities, it has also introduced significant risks to the financial sector. In this study, we follow the PRISMA approach (systematic literature review) to identify several DeFi benefits and challenges, as discussed in the existing literature. Based on the Scopus database, we critically scrutinized 64 published articles to report that although DeFi promotes financial inclusion and enhances financial transparency and accountability, the ecosystem also faces security issues, regulatory ambiguities, and price volatility. By providing a balance between the benefits and risks associated with DeFi, this study will help investors and other stakeholders make informed decisions and will serve as a valuable resource for formulating strategies to better regulate the DeFi ecosystem.

Keywords

• Decentralized finance
• DeFi
• benefits
• risks
• PRISMA

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