Exploring the Mechanisms of Decentralized Finance

(DeFi) Using Blockchain Technology

2024 3rd International Conference on Creative Communication and Innovative Technology (ICCIT) | 979-8-3503-6749-2/24/$31.00 ©2024 IEEE | DOI: 10.1109/ICCIT62134.2024.10701148

Andry Alamsyah Nanda Salsabila

School of Economics and Business School of Economics and Business
Telkom University Telkom University
Bandung, Indonesia Bandung, Indonesia
[email protected] [email protected]

Abstract—Decentralized Finance (DeFi) has revolutionized the panies. Innovations such as credit cards, ATMs, and mobile
financial landscape through blockchain technology, offering in- payment apps have played a crucial role in transforming the
novative solutions for efficiency and transparency in finance. delivery of financial services and opening new possibilities in
However, its mechanisms still need to be explored. This study
examines DeFi products, services, benefits, and emerging threats the financial world. Simultaneously, decentralization involves
through a detailed literature review, phenomenological research, distributing control and decision-making across a network
and interviews, presenting valuable insights and proposed so- without relying on a central authority. As a distributed ledger
lutions. The study aims to be a critical scholarly reference technology, blockchain ensures secure and transparent trans-
and inspire decentralized innovation by robustly understanding action recording across computer networks.
DeFi’s evolutionary dynamics. It highlights significant benefits
like increased financial inclusion, transparency, and efficiency The concept of decentralization within blockchain has given
while addressing risks such as smart contract vulnerabilities, rise to decentralized finance (DeFi), encompassing various
over-collateralization, liquidity challenges, and regulatory uncer- financial services, such as lending, borrowing, and trading.
tainties. The novelty lies in its comprehensive examination of DeFi These DeFi services operate on blockchain platforms, elim-
mechanisms, offering unique insights into user experiences and inating the need for traditional intermediaries such as banks
practical applications. Detailed insights are provided into various
DeFi mechanisms, including lending and borrowing, Automated and marking a significant shift toward a more inclusive and
Market Makers (AMMs), yield farming, staking, decentralized transparent approach to financial services. Integrating Real-
exchanges (DEXs), stablecoins, payments, and insurance. Future World Assets (RWA) into DeFi aims to enhance market
research should focus on enhancing security measures, exploring efficiency, liquidity, global accessibility, and transparency.
scalable solutions, and assessing DeFi’s long-term impact on Tokenizing assets on decentralized platforms streamline trans-
traditional financial systems. By addressing these concerns, DeFi
can continue to evolve and provide innovative financial solutions. actions, reduces costs, and boosts liquidity. It also democ-
ratizes investment opportunities, empowering a broad range
Keywords—Decentralized Finance (DeFi), Blockchain Technol- of investors. Blockchain technology ensures transparent and
ogy, DeFi mechanisms, Financial Industry, Cryptocurrency. secure transactions, reducing fraud risks. The goal is to unlock
value, improve efficiency, and broaden access to investment
I. I NTRODUCTION opportunities while ensuring transparency and security.
Finance is a broad term that refers to managing money DeFi has the potential to disrupt traditional finance due
and other assets. It involves investing, budgeting, lending, to several advantages, including transparency, elimination of
borrowing, and managing risks. The primary goal of finance middlemen, accessibility, low fees, high interest rates, and
is to allocate resources efficiently, optimize the use of funds, programmability. Apart from providing alternatives to bank-
and maximize the value of assets. It is crucial in personal, ing and investment services, DeFi protocols facilitate global
corporate, and governmental decision-making [1]. lending and borrowing at lower costs than traditional finance.
However, it’s important to note that while decentralization During uncertain times, the DeFi space offers insurance mech-
makes the process more efficient by not relying on third anisms using both on-chain and off-chain data, enhancing
parties, these third parties in finance are also crucial. They security.
play a significant role in guaranteeing security, preventing Despite its transformative potential, there’s a lack of scien-
the loss of money, and mitigating the risk of fraud, among tific publications and user awareness about DeFi. To address
other essential functions [2]. The financial landscape has this gap, our research uses a structured approach, including
undergone significant changes over time, setting the stage for literature review, phenomenological research, and interviews.
the evolution of financial systems and practices.
II. M ETHODELOGY & L ITERATURE R EVIEW
The evolution in finance signifies continuous development
and changes in systems, technologies, and instruments, pro- A. Methodology
gressing from traditional banking to electronic trading plat- The study employs literature reviews, phenomenological
forms, online banking, and the emergence of fintech com- research, and interviews to explore the complex mechanisms

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 of DeFi in the financial industry, focusing on blockchain’s and among others. Articles cover technological aspects of
transformative impact on operational efficiency and innovation blockchain, practical considerations in the financial industry,
in DeFi products and services, as shown Fig. 1. and applications in finance. Additionally, we analyzed key
DeFi and crypto project whitepapers, supplemented by website
examination and practical examples to enhance understanding.
B. Literature Review
Zhang, Chan, and Tarr studied blockchain, which explores
energy usage and insurance applications [4]. Despite its poten-
tial, enterprise adoption is hindered by early-stage challenges
[5]. Based on participant authorization, classifying permis-
sioned and permissionless blockchains is pivotal, prioritizing
controlled or direct access [6].
Fig. 1. Research Methodology Smart Contracts and Distributed Ledger Technology (DLT)
are foundational drivers. Smart Contracts ensure immutability
By synthesizing theoretical frameworks, empirical findings, by executing predefined conditions on the blockchain [7]. DLT,
and insights from interviews, the methodology aims to bridge distributing transaction records for a decentralized ledger,
the gap between theory and real-world implementation in the forms a transparent foundation [8]. Focused on blockchain’s
dynamic field of DeFi. Phenomenological investigations are financial impact, this sets the stage for understanding DeFi
incorporated to understand individuals’ subjective experiences mechanisms, bridging theoretical concepts with practical fi-
and perceptions in DeFi transactions, providing insights into nancial implementations [9]. The literature review navigates
their motivations and challenges. Through open-ended inter- blockchain complexities in crypto asset transactions, providing
views, we seek to grasp the essence of these experiences a comprehensive perspective on DeFi intricacies.
and their influence on the adoption and evolution of DeFi 1) Blockchain Blockchain is a distributed data technology
technologies. To understand DeFi mechanisms, specific criteria that enables decentralized and secure transaction record-
serve as keywords for literature filtering, covering DeFi, token ing [10]. This revolutionary technology functions as an
economy, application, implementation, and blockchain for immutable distributed digital ledger, where transaction
business processes [3]. records or information are chronologically stored in
The research design encompasses diverse methodolo- interconnected blocks, ensuring the integrity and trans-
gies such as ethnographic studies, case analyses, interviews, parency of data [11]. Initially, blockchain was introduced
phenomenological investigations, and grounded theory ap- to the world through its application in cryptocurrencies,
proaches. Such an approach creates a robust taxonomy, unrav- such as Bitcoin, which showcased its potential for secure
elling the intricacies of DeFi, providing insights for academic and decentralized digital currency transactions. How-
reference, and fostering innovation within decentralized sys- ever, the utility of blockchain has significantly expanded
tems. beyond cryptocurrencies. Today, it is applied across vari-
This literature-driven exploration sets the stage for a deeper ous fields, including decentralized finance (DeFi), which
dive into the specifics of DeFi mechanisms. The literature leverages blockchain to create a more transparent and
search involved various engines and databases, including accessible financial system; logistics, where it enhances
Google Scholar and Scopus, focusing on DeFi and blockchain supply chain transparency and efficiency; healthcare,
technology. Guided by essential questions, the review explores by securing patient data and streamlining healthcare
mechanisms within DeFi, sourcing information from academic records; and many other sectors, demonstrating its ver-
papers, DeFi token whitepapers, and projects. Positioned our satility and robustness.
inquiry to delve into practical examples and operational as- In the Table I provides a detailed summary of these
pects of prominent DeFi and crypto projects in our next critical components, including decentralization, which
research phase, ensuring a seamless transition. The pivotal eliminates the need for a central authority by distributing
questions guiding our search encompass the following: the ledger across multiple nodes; and security, which
• How do these key features contribute to disrupting the is fortified by cryptographic techniques that protect the
financial industry within the DeFi framework? integrity of the data and prevent unauthorized modifi-
• What advantages and disadvantages are associated with cations [12]. These features, among others, highlight
the various features and mechanisms of DeFi? the transformative potential of blockchain technology.
• Is it possible to delve into the operational mechanisms of These features collectively contribute to the robustness
various DeFi products, shedding light on their function- and versatility of blockchain technology, making it a
alities, benefits, and potential drawbacks? suitable foundation for decentralized finance and other
We rigorously gathered data from diverse academic publish- innovative applications. The continuous evolution and
ers, including 32 scholarly articles, with notable contributions improvement of blockchain technologies promise to
from IEEE (40%), Digital Business (25%), ACM (10%), unlock even more potential use cases, driving further

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 TABLE I and liquidity protocols, economic tokens may represent
B LOCKCHAIN K EY F EATURES ownership in liquidity pools. Liquidity providers are
No Feature Description often rewarded with these tokens in proportion to their
1 Decentralization Distributing control away from a central contributions.
authority, with every network participant • Smart Contracts: Token economies heavily rely on smart
maintaining a copy of the entire ledger, thus
eliminating single points of control and failure. contracts, self-executing contracts with the terms directly
It improves security, reduces the risk of single written into code. Smart contracts automate various pro-
points of failure, and gives users greater cesses, such as lending and borrowing, without the need
control.
2 Security Each block is linked to the previous block, and for traditional intermediaries.
each transaction undergoes verification. It • Staking and Yield Farming Tokens: Economic tokens are
increases data reliability and integrity, reducing frequently used in staking mechanisms and yield farming,
the risk of fraud or unauthorized data changes.
3 Transparency Data is open and accessible to all nodes on the where users lock their tokens to secure the network or
network, and many nodes must agree to provide liquidity, earning additional tokens as rewards.
changes before they become permanent. It • Decentralized Autonomous Organizations (DAOs): Eco-
increases transparency and accountability,
allowing users to verify and audit. nomic tokens, including DAI, play a crucial role in DAOs
4 Immutability Data recorded in blocks is difficult to change associated with DeFi projects. Holders of these tokens
once the network confirms it. It prevents can influence decision-making processes and participate
unauthorized changes or data theft.
5 Smart Self-executing code that triggers automatically
in the governance of the decentralized organization.
Contracts when certain conditions are met. It automates The interplay between blockchain and the token econ-
and secures business processes, minimizing the omy is crucial in forming a decentralized ecosystem. As a
need for intermediaries.
6 Consensus The process by which nodes in a network foundational technology, blockchain offers essential elements
Mechanism agree on the status or validity of a transaction, of security, distribution, and transparency for recording and
using specific algorithms or protocols. It managing economic tokens [15].
prevents duplication, ensures data consistency,
and creates a fair and secure system without This paper focuses on decentralized financial mechanisms
relying on external trust. using blockchain technology, highlighting how DeFi works
7 Tokenization The process by which nodes in a network rather than implementing blockchain in other mechanisms
agree on the status or validity of a transaction
using specific algorithms or protocols. It [16]. This approach provides readers with an overview of
prevents duplication, ensures data consistency, how Decentralized Finance operates within the existing mech-
and creates a fair and secure system without anisms in the financial industry.
relying on external trust.
8 Irreversibility Completed transactions cannot be reversed or
changed once confirmed on the blockchain. It
III. DEFI M ECHANISME
ensures that completed transactions cannot be We define the DeFi mechanism for each application con-
modified or cancelled by unauthorized parties.
9 Cost Eliminating intermediaries reduces transaction
cisely. Decentralized lending and borrowing enable users to
Efficiency costs. This reduction increases efficiency, engage in digital asset transactions without traditional inter-
especially on a large number of transactions. mediaries, opening avenues for interest earnings and capital
access [17]. AMMs use algorithmic systems and automation
for decentralized asset exchange, providing liquidity and fa-
adoption across diverse industries and transforming the cilitating user participation in trading. Yield farming involves
way we conduct digital transactions and manage data. users supplying liquidity to DeFi protocols for rewards, while
2) Token Economy staking allows users to lock up assets to support blockchain
In DeFi, the token economy is a structured system where networks and earn rewards [18]. DEXs facilitate peer-to-
digital tokens play a crucial role in governance, protocol peer digital asset trading, enhancing accessibility and secu-
activities, and collateral in lending. Tokenization, enabled rity. Stablecoins, pegged to stable assets, offer stability in
by blockchain, converts traditional assets into secure digital transactions by mitigating cryptocurrency volatility [17]. DeFi
tokens, ensuring integrity and ownership protection. These insurance mechanisms enhance transparency and accessibility
tokens represent real-world or digital assets on the blockchain, in the insurance sector. Together, these mechanisms drive the
allowing for their trading or utilization in decentralized proto- growth of DeFi, fostering financial inclusion, transparency, and
cols [13]. The DeFi token economy serves as a cornerstone, efficiency in decentralized finance [19].
enhancing the functionality and dynamism of the overall de-
centralized finance ecosystem [14]. Several key aspects define A. Lending and Borrowing
this concept: In the DeFi ecosystem, users can engage in lending and
• Utility Tokens: These tokens may have utility within borrowing activities through decentralized platforms known
the DeFi ecosystem, serving as a medium of exchange, as lending protocols. For instance, platforms like Compound
providing access to specific features or services, or acting Finance enable users to deposit their cryptocurrency assets,
as collateral for loans. such as Ethereum (ETH), into smart contracts to earn interest
• Liquidity Provider Tokens: In decentralized exchanges on their holdings [20]. Concurrently, borrowers can utilize

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 their cryptocurrency holdings, like DAI, as collateral to borrow vulnerabilities, and market manipulation. The evolving nature
assets from the same platform [21]. Smart contracts govern of DeFi protocols adds complexity, posing challenges for
these transactions, automating the lending and borrowing pro- inexperienced users and increasing the risk of financial losses.
cesses without the need for intermediaries like banks. Interest
C. Automated Market Makers (AMMs)
rates, collateral ratios, and loan terms are algorithmically
determined within each DeFi lending protocol based on supply AMMs like Uniswap enable users to exchange cryptocur-
and demand dynamics to allow users to earn interest on their rencies directly without intermediaries. For instance, in the
assets or access liquidity through collateralized borrowing Uniswap protocol, users can swap ETH for DAI tokens directly
[22]. The mechanism illustration is presented in Fig. 2. DeFi from their digital wallets [26]. This process relies on liquidity
lending and borrowing offer advantages such as creating pools, such as the ETH/DAI pool, which contains reserves of
new money and contributing to interest rates, liquidity, and both ETH and DAI provided by users. By contributing liquid-
market efficiency. Smart contract-based protocols facilitate ity to these pools, users can earn rewards through transaction
loan intermediation, providing a novel financing approach. fees paid by traders [8].
These benefits are borderless, enabling global participation The mechanism illustration is presented in Fig. 4 AMM
[23]. However, DeFi faces drawbacks, including vulnerability provides continuous access and eliminates intermediaries for
to attack vectors like flash loans and a lack of reliable data, peer-to-peer trading. Users can contribute liquidity, earning
raising concerns about potential financial crises [20]. a share of transaction fees. While offering decentralization,
challenges such as impermanent loss, slippage, manipulation
risk, and limited order types should be considered. Despite
these challenges, AMMs play a pivotal role in reshaping
decentralized exchanges, and users are advised to assess both
the advantages and disadvantages of informed engagement.

Fig. 2. Lending and borrowing mechanism

B. Yield Farming
Yield farming, a popular strategy in DeFi involves users
earning additional tokens or rewards by staking their cryp-
tocurrency holdings. In the DeFi protocol Uniswap, users can
become liquidity providers by adding tokens to pools like
Fig. 4. Automated market makers mechanism
ETH/USDT [24].
In return, they receive rewards in the form of UNI tokens,
the native cryptocurrency of the Uniswap platform [25]. Smart D. Staking
contracts in these pools automate transactions and distribute Staking on the Ethereum 2.0 network involves users locking
rewards based on user contributions. Yield farming often uses up their ETH tokens to support the network’s operations and
decentralized applications (DApps) like Uniswap, where users earn rewards. Users can stake their ETH through DeFi plat-
stake or lock assets to provide liquidity. The core principle forms like Rocket Pool or Lido Finance [27]. After connecting
can be summarized in pseudocode: initialize the contract, stake their cryptocurrency wallet to the platform, users select the
tokens, withdraw tokens, claim rewards, and update rewards, amount of ETH they wish to stake and the duration of the
ensuring secure transactions and fair distribution. staking period. Once confirmed, users contribute to validating
transactions on the Ethereum network and receive rewards in
the form of additional ETH or a share of transaction fees. This
process allows users to passively earn income while actively
participating in the Ethereum ecosystem [28].
The mechanism illustration is presented in Fig. 5, staking
offers several advantages, such as earning additional cryp-
tocurrency rewards and gaining governance rights for protocol
decision-making. However, there are challenges associated
Fig. 3. Yield farming mechanism with staking. These include the potential liquidity limitation
and access to funds due to tying up assets for a specific time.
The mechanism illustration is presented in Fig. 3 Yield The volatility of cryptocurrency markets also poses risks, as
farming offers passive income, potentially surpassing tradi- the value of the staked assets can fluctuate and potentially lead
tional investments. It provides an interactive experience, en- to financial losses.
abling user participation and ecosystem contribution. However, Additionally, reliance on smart contracts introduces security
it comes with risks such as impermanent loss, smart contract risks, as vulnerabilities can expose users to security breaches.

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 There is also a concern about centralization if a small number This decentralized approach ensures transparency and acces-
of large stakeholders have a significant influence, which goes sibility for everyone in the DeFi community.
against the principle of decentralization in the network. The mechanism illustration is presented in Fig. 7. DeFi
insurance brings several advantages, including decentralization
and a transparent claims process on the blockchain. Users can
customize their coverage based on individual needs. However,
it comes with risks. Smart contract vulnerabilities may expose
users to potential exploits, and the influence of market volatil-
ity on premiums and payouts could impact overall stability
[29].
Additionally, the limited regulatory framework in DeFi
insurance raises considerations about consumer protection.
Before participating, users should carefully weigh the benefits
and risks to make informed decisions in the decentralized
insurance space.
Fig. 5. Staking mechanism

E. Payment
DeFi payment systems like Compound Finance enable users
to conduct transactions and engage in financial activities
without intermediaries. Using blockchain and smart contracts,
users can transfer value seamlessly and securely. Examples of
tokens used within Compound Finance include cTokens, which
represent deposited assets and accrued interest over time. This
platform facilitates real-time, low-cost transactions while ad-
Fig. 7. Insurance mechanism
dressing cryptocurrency volatility by providing stable interest
rates. Compound Finance contributes to the broader adoption
of digital assets and the expansion of DeFi ecosystems by G. Decentralized Exchanges
tackling exchange rate stability issues. Uniswap, a leading decentralized exchange (DEX) operating
The mechanism illustration is presented in Fig. 6. The bene- on the Ethereum blockchain, enables users to trade various
fits of DeFi payment mechanisms, such as efficiency, security, ERC-20 tokens directly from their wallets using an Automated
and transparency, are clear. However, it’s equally important Market Maker (AMM) model. This model allows for token
to recognize the potential challenges. These include smart swaps at algorithmically determined prices via predefined
contract vulnerabilities, market volatility affecting transaction liquidity pools. Despite a decline in transaction value from
values, and the learning curve associated with DeFi payment 19.6billionin2022to7.82 billion in 2023, a report on the
platforms. In this landscape, users should prioritize making Indonesian crypto & web3 industry highlights a significant
informed financial decisions, exercising awareness of these uptick in transactions in November 2023, with Uniswap main-
factors, and conducting thorough research to mitigate risks. taining over 50% market share each quarter.

Fig. 6. Payment mechanism

Fig. 8. Decentralized exchanges mechanism

F. Insurance
Insurance, like Nexus Mutual, allows users to protect their Such performance indicates sustained trust in Uniswap
assets from risk in the ecosystem by purchasing coverage with amidst the rise of new DEX platforms. In Fig. 8, the mech-
NXM tokens. In incidents such as smart contract vulnera- anism of token swaps through liquidity pools is illustrated
bilities or hacks, users can file compensation claims directly in detail. Uniswap offers increased privacy, reduced risk of
through the platform, eliminating the need for intermediaries. hacking, and greater autonomy over funds without a central

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 authority, thus minimizing censorship and supporting a broad which can be vulnerable and lead to financial losses. Addi-
array of tokens. tionally, many DEXs face challenges, including smart contract
However, it faces challenges such as potentially lower vulnerabilities, lack of liquidity, scalability and network con-
liquidity than centralized exchanges, which can affect trade gestion, insufficient user protection, regulatory risk, and user
execution, a less intuitive interface for newcomers, and slower (non-custodial) errors. Addressing these issues requires ro-
transaction speeds due to its decentralized nature. Additionally, bust security measures, improved liquidity, scalable solutions,
the absence of regulation raises concerns about potentially enhanced user protection, regulatory compliance, and user
fraudulent activities [30]. A notable vulnerability in DEXs like education to mitigate the mistakes. Our findings indicate that
Uniswap is the susceptibility of smart contracts to exploits, DeFi platforms like Compound and Aave offer transparency
such as reentrancy attacks, demonstrated by incidents like and eliminate traditional intermediaries. However, they are
the DAO attack [31]. These vulnerabilities, stemming from vulnerable to risks such as over-collateralization and liqui-
contract code flaws and exacerbated by blockchain technol- dation due to crypto asset volatility. AMMs like Uniswap
ogy’s immutable nature, highlight the critical need for ongoing facilitate decentralized trading using liquidity pools but face
security enhancements. issues like impermanent loss and smart contract exploits. Yield
farming offers high returns but involves speculative risks and
H. Stablecoin potential project collapses. Staking provides passive income
Stablecoin creation begins with users depositing assets into but locks up assets and carries volatility risks. DEXs enhance
the system, typically fiat currency or other cryptocurrencies privacy but have lower liquidity and are prone to manipulation.
[32]. These collateralized assets support stablecoin issuance Stablecoins offer stability but can suffer from centralization
by maintaining a specific asset-to-stablecoin ratio. Once users and algorithmic failures. DeFi payment systems streamline
deposit and confirm, stablecoins are issued. These stablecoins transactions but lack consumer protections. DeFi insurance
facilitate transactions, including transfers, payments, and trad- platforms provide coverage but are not immune to smart
ing. When users redeem stablecoins for underlying assets (e.g., contract vulnerabilities and market volatility. Moreover, while
fiat currency), they initiate the redemption process, which may DeFi has the power to transform finance due to blockchain
involve additional verification. After redemption, stablecoins technology, user experience is a stumbling block for broader
can be ”burned” to maintain value parity with collateralized adoption. Navigating DeFi platforms, understanding the Token
assets. Economy, and managing private keys can be daunting, espe-
cially for those new to blockchain. Therefore, there’s a signif-
icant need for user-friendly interfaces, educational efforts, and
enhanced security to make DeFi platforms more user-friendly
and attractive. Addressing the risks associated with DeFi
mechanisms requires a multi-faceted approach. Implementing
advanced security protocols, regular smart contract audits, and
using secure oracles can help mitigate the risk of exploits and
vulnerabilities. Developing mechanisms to enhance liquidity,
such as incentivizing liquidity providers and creating liquidity
pools, can address liquidity challenges in DEXs and lending
Fig. 9. Stablecoin mechanism platforms. Investing in scalable blockchain solutions to reduce
network congestion and improve transaction speeds is crucial
The mechanism illustration is presented in Fig. 9 stablecoins for the broader adoption of DeFi. Developing user-friendly
are a cornerstone of DeFi, offering stability and security in interfaces, providing comprehensive educational resources,
transactions in the midst of crypto market volatility. However, and implementing more robust consumer protection measures
it’s crucial to remember that they are not risk-free. Central- can help mitigate user errors and improve the overall user
ization in some stablecoins, dependency on the stability of experience. Collaborating with regulators to develop clear
underlying assets, and challenges with algorithmic stability are guidelines and frameworks for DeFi can ensure a balanced
all potential issues. Users in DeFi should always keep these approach to innovation and consumer protection. Promoting
risks in mind when engaging in financial activities. educational efforts to increase user awareness and understand-
ing of DeFi mechanisms, risks, and best practices is essential
IV. D ISCUSSION for fostering a safer and more inclusive DeFi ecosystem.
The study explores various DeFi mechanisms, including Future research should focus on identifying and mitigating
decentralized lending and borrowing, Automated Market Mak- smart contract vulnerabilities, exploring scalable blockchain
ers (AMMs), yield farming, staking, decentralized exchanges solutions, and assessing the long-term impact of DeFi on
(DEXs), stablecoins, payments, and insurance. These mecha- traditional financial systems. Additionally, there is a need to
nisms aim to enhance financial inclusion, transparency, and investigate the regulatory implications of DeFi and develop
efficiency but also present significant risks and challenges. frameworks that balance innovation with consumer protection.
A key concern is the reliance on immutable smart contracts, Monitoring regulatory developments and their impacts on DeFi

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 can provide timely insights and recommendations. Research for further research into the mechanisms and risks of DeFi,
into user experience improvements and the development of encouraging a deeper exploration of how these technologies
educational resources will also be critical in ensuring the can be refined and regulated. For practitioners, understanding
wider adoption and sustainable growth of DeFi platforms. By the detailed workings and associated risks of DeFi mecha-
addressing these concerns, DeFi can continue to evolve and nisms can aid in better implementation and risk management
provide innovative solutions for the financial industry. strategies. Policymakers can also use these insights to craft
balanced regulatory frameworks that foster innovation while
V. C ONCLUSION protecting consumers.
Our research has successfully revealed the mechanisms of
DeFi, making it easier for people to understand how it func- ACKNOWLEDGMENT
tions. We detailed the mechanisms of lending and borrowing, The authors would like to express their deepest gratitude
AMM, yield farming, staking, DEX, stablecoins, payments, to the School of Economics and Business, Telkom Univer-
and insurance. This expanded understanding of financial ac- sity, for their unwavering support throughout this research
tivities through blockchain technology opens opportunities for project. This includes providing access to essential resources,
developing innovations or reviving similar products in the digi- facilities, and academic guidance, which were instrumental
tal economy. The findings indicate that DeFi offers numerous in the successful completion of this study. Additionally, we
benefits, such as increased financial inclusion, transparency, are sincerely grateful for the financial support extended to us,
and efficiency, but it also presents significant risks. These risks which significantly contributed to the smooth progression of
include smart contract vulnerabilities, over-collateralization, our research activities.
liquidity challenges, and regulatory uncertainties. Addressing
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