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Launched in 2015, Ethereum has emerged as the world’s second-largest blockchain, serving as the foundation for Decentralized Finance (DeFi). This innovative financial paradigm is transforming the delivery of financial services by leveraging open-source, blockchain-based smart contracts to facilitate lending, trading, and asset management without reliance on banks or intermediaries. Once executed, these smart contracts are immutable, ensuring a level of transparency, security, and governance through code.
DeFi removes the need for banks and brokers, which lowers costs and speeds up transaction processes.
Platforms such as Aave and MakerDAO empower users to lend or borrow assets secured by cryptocurrency collateral, with interest rates determined by market supply and demand.
Anyone with internet access can utilize DeFi services, overcoming geographical and bureaucratic limitations.
All transactions are recorded on the blockchain, making them public and auditable, thereby enhancing trust and accountability.
Emerging protocols like Nexus Mutual and InsurAce offer protection against potential smart contract exploits and platform failures, thus increasing investor confidence.
Users can engage in trading options and futures directly on DeFi platforms, expanding their investment opportunities.
India is at the forefront of DeFi adoption, driven by a tech-savvy population and over 190 million unbanked adults. DeFi effectively addresses challenges such as high remittance fees, limited credit availability and financial exclusion.
Facilitates seamless asset transfers across various blockchains, such as Ethereum, Solana, and Polygon, fostering a unified DeFi ecosystem.
Artificial Intelligence (AI) enhances functionalities like trading, fraud detection and risk management leading to safer and smarter DeFi solutions.
Traditional banks and investment funds are integrating DeFi into their operations, offering hybrid products that broaden access.
INR-backed stablecoins are required to maintain reserves at a 1:1 ratio and are subject to audits mandated by the Reserve Bank of India (RBI), promoting stability and compliance.
The RBI and the Securities and Exchange Board of India (SEBI) have yet to clearly define DeFi regulations, resulting in a compliance void.
India has implemented a slab-based taxation system for cryptocurrency:
Coding errors or vulnerabilities can lead to significant financial losses. Consequently, many platforms undergo regular audits and offer insurance.
A lack of centralized oversight means there is limited recourse available for resolving disputes.
Public blockchains may expose user data, prompting the evolution of privacy solutions.
A substantial portion of the Indian population remains unaware of the advantages and risks associated with DeFi, underscoring the importance of education.
Effective July 1, 2025, Alternative Investment Funds (AIFs) must maintain new investments in dematerialized form to simplify compliance.
New regulations for fund management entities within the GIFT IFSC ensure that teams are qualified and compliant.
Platforms are now required to acquire licenses, comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, and report activities to competent authorities.
To fully harness the potential of DeFi, India should:
If risks are effectively managed and regulations evolve in tandem with technological advancements, DeFi could deliver a transparent, efficient, and inclusive financial system for millions of Indians.