An Overview of Decentralized Finance (Defi)

Decentralized finance (or defi) refers to the suite of financial activities and services that are facilitated by cryptocurrency and intended to be conducted without any sort of reliance on traditional financial tools or intermediaries. The range of activities encompassed under the heading of defi range from certain activities that are fundamental to the functioning of blockchains on which cryptocurrencies, such as mining and validating, are transacted to cryptocurrency-backed services that mimic traditional financial activities, such as lending and trading. The defi environment is built on cryptocurrency and smart contracts. Smart contracts are pieces of code that self-execute when certain requirements are met. They are essential to the variety of services offered—including borrowing and lending protocols, defi exchanges, and mixers, which may shield digital asset ownership—and take the place of the intermediary in traditional finance. As of March 2026, total value locked, a popular measure that constitutes the amount of value parked in all defi protocols, is about $98 billion. While defi has evolved to provide services that roughly resemble those in the traditional financial system, it is still much smaller than the traditional financial services markets, and environments (uses and conditions) frequently differ significantly from traditional finance. Whereas services in the traditional financial sector experience various degrees of regulation, defi, like self-custodied crypto, is permissionless and its technical features may create challenges for compliance with and enforcement of regulations. The traditional financial system has also constructed certain parameters—such as credit scores, financial thresholds, and underwriting standards—on which the provision of certain financial services hinges. Defi eschews these customs and instead relies on technological tools and collateralization for all transactions. Also, while financial institutions are integral to the intermediation of financial transactions in the traditional financial system, smart contracts do not rely on companies and allow individuals to participate directly in the financial transaction without the need for further intermediation or input. Defi’s regulatory treatment is unsettled. Various policy issues stem from a lack of clarity regarding the industry’s regulatory treatment. After a period in which certain activities were presumed to be subject to existing regulation but whose compliance and enforcement experienced challenges, regulatory expectation seems to be shifting. Whether such services are regulated—and if so, how—may have consequences for the proliferation of potential benefits and certain risks. These issues include regulatory arbitrage and the potential buildup of financial risk in less-regulated financial sectors, the outlook for financial technological innovation in the United States, and challenges for implementing anti-money laundering rules for defi platforms and at the intersection of centralized and decentralized crypto. To date, much of the discussion about defi revolves around its role as infrastructure for crypto transactions. However, as more traditional financial products become eligible to use the infrastructure through tokenization or other technological means, the focus of the defi debate may expand to include traditional financial institutions and products. Because of the overlap of the defi and crypto industries, H.R. 3633, the crypto market structure-focused Digital Asset Market Clarity Act of 2025 (or CLARITY Act) that the House passed in July 2025 and related bills being debated in the Senate would inevitably have consequences for defi. While the primary aim of these bills would be to establish a new regulatory framework for cryptocurrencies, both the CLARITY Act and various versions of bills in the Senate appear mostly to not apply to defi. Some of these exclusions would seemingly applying to mixers—some of the sectors of the defi industry that have historically been tied to illicit finance. Congress may also consider alternative standalone and separate regulatory structures.