Use Cases of DeFi

If you have been wondering how blockchain or cryptocurrency works and how you could make money out of it, you might have come across the term “DeFi” or “Decentralized Finance”. But what do these terms actually mean?

All blockchain applications that offer financial services fall under the realm of Decentralized Finance. DeFi is revolutionizing the modern finance industry by eliminating intermediaries such as banks or brokers. 

In 2025, the total value locked (TVL) in decentralized finance (DeFi) protocols reached around $60 billion, marking a notable rise from the $36 billion seen in late 2023. Without the need for centralized institutions anymore, this rapid growth demonstrates the increasing trust and interest in decentralized solutions.

DeFi’s decentralized nature appeals to users because it reduces the risk of institutional control or corruption. It also offers global accessibility, allowing anyone with an internet connection to participate. 

In this blog, we will explore the major use cases that are driving DeFi’s momentum and the profound impact they have on reshaping financial ecosystems.

Core Principles of DeFi:

The foundations of DeFi are built on several core principles that differentiate it from traditional finance:

Decentralization:

One of the core features of blockchain technology is decentralization. DeFi operates on blockchain and inherits decentralization as well. DeFi platforms distribute control across a network of nodes emphasising on equitable distribution of authority across a network.

Unlike centralized systems, where a single entity governs the system, DeFi ensures that no single point of failure or control exists. Therefore, users should carefully evaluate the structure of any DeFi platform to ensure it aligns with decentralization principles and mitigates potential vulnerabilities.

The majority of DeFi applications exist on the Ethereum blockchain, but there are some applications on other platforms as well such as Solana and Cardano.

Smart Contracts:

These are self-executing contracts written in code. Whenever a certain condition is met, a specified outcome is observed. Smart contracts reduce the need for intermediaries but in some cases, external parties such as oracles or auditors, may be involved to ensure the integrity of data inputs or contract execution. 

Smart contracts also minimize human error and the risk of fraud, as they follow strict predefined rules but they clearly lack inherent “intelligence” or decision-making abilities beyond their coded instructions. Their transparency and immutability make them trustworthy.

Transparency:

All transactions over any public blockchain and smart contracts are publicly available, enhancing trust among users. This transparency has been key in attracting a large user base, as evidenced by the surge of active DeFi wallets, which crossed the 7 million mark in 2025.

• Trust: Blockchain ensures that all transactions are visible and auditable, which builds trust among participants, reducing fraudulent transactions.
• Openness: The code behind a blockchain network is often open source, allowing anyone to view, inspect, and contribute to it.
• Verifiability: Blockchain ensures that all data is traceable and verifiable, making it impossible to alter the history without detection.

Immutability and Security:

Immutability means that once a transaction is recorded on a blockchain, it cannot be changed or tampered with, ensuring a high level of security. 

The data stays on the blockchain forever, creating a permanent and tamper-proof record.

However, immutability also introduces a challenge: if a smart contract has a flaw, that flaw is permanent and can lead to vulnerabilities. Despite the risks, the immutable nature of blockchain is a powerful tool for ensuring accountability.

Global Accessibility:

Without any geographical restrictions and the need of a bank account, anyone with an internet connection can access DeFi services. This characteristic makes DeFi particularly beneficial in regions with underdeveloped financial systems.

It provides global access to services like lending, borrowing, trading, and insurance. DeFi is driving financial inclusion, particularly in areas where traditional banking services are either too costly or non-existent.

Major Use Cases of DeFi:

Now let’s dive in to the practical examples of DeFi:

1- Lending and Borrowing:

DeFi platforms allow users to lend and borrow without the need for intermediaries like banks. In this system, users can lend their crypto assets to others in return for interest or borrow crypto by providing collateral.

Mechanism:

Smart contracts are utilized. The borrower deposits collateral and based on predefined terms, the loan is issued. If the borrower defaults, the collateral is liquidated. 

Key Platforms:

• Aave: It is a decentralized liquidity protocol where users can lend or borrow assets. It introduced features such as flash loans which allow users to borrow assets without collateral but they need to return the borrowed fund within a single transaction block. 
• Compound: It allows users to earn interest or borrow assets by supplying collateral to liquidity pools. The decentralized structure of Compound allows users the surety that they have full control over their assets.

2- Decentralized Exchanges (DEXs):

DEXs are DeFi platforms where cryptocurrency traders can directly trade with each other without the need for intermediaries like centralized exchanges. These platforms utilize liquidity pools instead of order books to ensure liquidity for trading pairs.

Mechanism:

With the help of smart contracts, trades are executed automatically when conditions are met.  Users trade directly from their wallets, ensuring better security and privacy.

Key Platforms:

• Uniswap: A leading DEX that uses an automated market maker (AMM) model, where users provide liquidity to pools and earn a share of the trading fees.
• SushiSwap: A fork of Uniswap that introduced features like liquidity mining and yield farming to attract users.

Benefits:

• Decentralization: No central authority controls the exchange.
• Anonymity: Users can trade without KYC (Know Your Customer) requirements.
• Control: Users maintain control over their funds, reducing the risk of hacks compared to centralized exchanges.

3- Stablecoins:

Stablecoins are a type of cryptocurrency that aim to provide stability. These are backed by real-world assets like fiat currencies. These assets are not affected by the price swings and are suitable as a medium of exchange and to store value.

Types of Stablecoins:

• Collateralized Stablecoins: These are backed by reserves such as Tether (USDT).
• Algorithmic Stablecoins: These are not backed by any reserves but they maintain their peg based on algorithms and market demand.

Use Cases:

Users can park their funds in stablecoins during market volatility or use them for cross-border transactions without worrying about price fluctuations.

4- Yield Farming and Staking:

Yield farming and staking allow users to earn rewards for providing liquidity or locking up their assets in DeFi protocols.

Yield Farming:

Users provide liquidity to a DeFi protocol (e.g., by adding tokens to a liquidity pool on Uniswap or SushiSwap). These users are then incentivized by rewards, often in the form of tokens. Yearn Finance is an example of such a protocol.

Staking:

In staking platforms, users lock up their assets in a network (often in proof-of-stake blockchains like Ethereum 2.0) to secure the network and they earn rewards in return.

Benefits:

• Passive Income: Yield farmers and stakers earn passive income on their crypto assets
• Enhanced Liquidity: Both yield farming and staking incentivize users to lock their assets in DeFi protocols which improves liquidity.
• Participation in Governance: In many DeFi platforms, users who stake tokens or participate in yield farming earn governance tokens which allow them to vote on the platform’s development and future direction.

5- Synthetic Assets:

Synthetic Assets in DeFi are basically tokenized versions of real-world assets. Real-world assets introduce liquidity to traditionally illiquid markets, allowing assets like commercial real estate or fine art to be traded quickly and with lower fees. Assets can be divided into minor portions where investors can buy parts of the asset instead of the whole.

How do they Work:

Synthetic assets are created by collateralizing crypto assets in a DeFi platform. Smart contracts maintain the peg of these synthetic tokens to the underlying asset.

Key Platforms:

• Synthetix: It is a DeFi protocol  for creating and trading synthetic assets such as sUSD (synthetic USD) or sBTC (synthetic Bitcoin).

Use Case:

A trader can gain exposure to gold or Tesla stocks without owning the real asset by holding synthetic versions of them, all while remaining on the blockchain.

6- Payments:

Users can make instant payments using DeFi protocols. Payments are made instantly from their wallet, often at lower costs than traditional systems, though fees can vary depending on the blockchain and platform used. Exclusive discounts are also provided to users, persuading them to continuously use the platform.

How it works:

Users can send and receive payments directly over the blockchain, usually through stablecoins, with minimal transaction fees and in a fraction of the time taken by traditional banking systems.

Key Platforms:

• Stellar: It is a blockchain focused on cross-border payments, designed to connect financial institutions and facilitate low-cost, high-speed payments.

Benefits:

• Low Costs: DeFi payment systems significantly reduce the cost and time associated with traditional payment methods, especially for cross-border transactions. 
• Speed: Cross-border payments that might take several days via traditional systems can be completed in minutes with DeFi protocols.

Challenges and Limitations in DeFi Adoption:

Security and Regulatory Risks:

• Smart contracts are not completely immune to security risks. Often bugs and hacking incidents have led to significant losses in the past. For instance, in 2022 alone, DeFi platforms experienced losses exceeding $3 billion due to various exploits. 
• DeFi poses a lot of uncertainty  about compliance with laws and regulations in different jurisdictions. Governments worldwide are increasingly paying attention to DeFi’s rise, focusing on anti-money laundering (AML) and Know Your Customer (KYC) protocols.

Scalability and Transaction Fees:

• With the growing ecosystem of DeFi, scalability issues take place because the network they operate on can often struggle with congestion. This leads to slower transactions.
• Due to congestion on Ethereum, transaction fees (gas fees) can become extremely high, even small transactions could become expensive. On a few occasions, Ethereum gas fees have exceeded $100 per transaction. This is a major concern for global adoption.

Usability and Accessibility Barriers:

• New users often struggle with DeFi platforms as they are not very user-friendly. The need for technical knowledge about wallets, private keys, and smart contracts also become a hindering factor in adoption.
• While DeFi aims to provide global financial access, the high costs, technical complexity, and lack of infrastructure in developing regions can limit accessibility.  Additionally, the volatility of cryptocurrencies can deter users from adopting DeFi for daily financial services.

Future Outlook:

Layer 2 Solutions:

While Layer 2 solutions like Optimism and Arbitrum are already being used to address scalability issues, they are constantly evolving. These platforms aim to further improve by reducing transaction fees, increasing throughput, and enhancing user experience. Ongoing developments, such as upgrades to zk-rollups and more efficient bridging between Layer 1 and Layer 2, promise to make DeFi even more accessible and cost-effective in the future.

Cross-Chain Protocols:

Cross-chain solutions, such as Polkadot and Cosmos, already allow different blockchains to interact. However, their full potential is yet to be realized. Future improvements will focus on smoother interoperability, faster asset transfers, and greater security across networks. These advancements will reduce the reliance on a single blockchain and expand DeFi accessibility beyond Ethereum, providing a more seamless user experience across multiple ecosystems.

Real-World Asset Integration:

Another emerging trend is the integration of RWAs in DeFi platforms. The use cases are beyond tokenized real estate, bonds, or other assets to be used within DeFi for lending, staking, and trading. This trend has the potential to bridge traditional finance with DeFi, unlocking new liquidity and investment opportunities for both institutional and retail users.

Key Takeaways:

1. DeFi removes the need for intermediaries like banks and brokers.
2. DeFi’s decentralized nature ensures there is no single point of control, and the open access to transaction data on the blockchain builds trust among users.
3. DeFi covers use cases like lending/borrowing, decentralized exchanges (DEXs), yield farming, synthetic assets, and payments, driving the ecosystem’s momentum.
4. Despite its advantages, DeFi faces hurdles such as scalability, high gas fees, security vulnerabilities, and regulatory uncertainties that hinder its widespread adoption.
5. Layer 2 solutions and cross-chain protocols are poised to overcome scalability issues and expand DeFi’s reach across multiple blockchains.

Conclusion:

The rise in DeFi platforms across the globe shows its potential. With its core principles of decentralization, transparency, and accessibility, DeFi is not only reshaping existing financial markets but also creating new opportunities for financial inclusion. However, challenges remain such as scalability issues and security vulnerabilities, but the future still holds lots of opportunities with layer 2 solutions and cross-chain protocols overcoming these challenges. 

By staying ahead of emerging trends like Layer 2 solutions, cross-chain protocols, and enhanced security measures, you can position yourself as a leader in the decentralized financial space. Talk to our specialists at BlockApex today to start securing your blockchain solutions!