Abstract
Within the past few years, Decentralized Finance (DeFi) had brought about drastic changes in the financial industry. At its core, this innovation aims to decentralize the traditional financial industry and make financial services readily available to the public, through the provision of a permissionless financial ecosystem built upon the blockchain infrastructure. With its rapid burgeoning, its threat towards existing financial structures and operations is increasingly apparent and imminent. To determine DeFi’s eventual dominance, this paper discussed and assessed the disruptive potential of DeFi in reshaping our existing financial industry. Apart from shedding light on the promises and novel applications of blockchain technology in the financial sector, research was conducted to delve deeper into two heavily popularised use cases of DeFi among the decentralized lending and exchanges platforms – liquidity pools and flash loans. Through the execution of liquidity pooling and flash loans using Uniswap’s and Aave’s protocols on Ethereum Testnets, their processes and interactions with the blockchain network were analyzed. Data were collected to determine the transaction fees, profitability, and risks associated with the processes, which were metrics used to assess DeFi’s threat in displacing current financial services. The study concluded that DeFi is still in its nascent stages of development with existing roadblocks that are limiting its potential in reshaping the finance industry, including exorbitant fees, unpredictable profitability, and risks stemming from its lack of regulation. This paper concluded by offering new entrepreneurial and business opportunities made possible with the merger between DeFi and regulated centralized financial institutions. With the adoption of blockchain technology in its operations, the traditional financial market will be able to reap benefits from both Centralized Finance (CeFi) and DeFi through collaboration and co-existence.