The building blocks of permissionless finance
In 2022, Canadian authorities froze the bank accounts of trucker protesters. In 2013, Cypriot banks seized up to 47.5% of uninsured deposits overnight. In Venezuela, a lifetime of savings can evaporate in months through hyperinflation.
These aren't edge cases. They're reminders that the financial system most people trust implicitly is built on a foundation of permission—permission that can be revoked.
DeFi offers a different architecture: financial services that run on code, not committees. No account freezes. No bank holidays. No permission required.
Not because institutions are evil, but because removing the need for trust removes the possibility of its violation.
Bitcoin (2009) proved you could move value without intermediaries. But Bitcoin's scripting language is deliberately limited—it settles transactions, not much else.
Ethereum (2015) changed the game by introducing smart contracts: self-executing programs that enable any financial logic to run on-chain. Suddenly you could build a lending market, an exchange, or a stablecoin as code.
The early experiments—MakerDAO (2014), Compound (2018)—remained niche. Then came "DeFi Summer" 2020.
In a few months, total value locked exploded from $1 billion to over $15 billion. Uniswap proved automated market makers could replace order books. Yield farming created new incentive structures. An entire financial system began assembling itself from open-source components—permissionless, composable, 24/7, and global by default.
By January 2025, DeFi TVL had grown to approximately $149 billion—surviving the 2022 collapse that saw it drop to $37 billion following FTX's implosion.1
What does it take to rebuild finance without permission?
Stablecoins bridge between volatile crypto and stable value—tokens pegged to USD that let you hold dollars without a bank. DEXes provide trading 24/7 with no application, no approval, no KYC. Lending protocols let you deposit assets to earn yield or borrow against collateral—capital efficiency without credit checks. Liquidity pools hold paired assets for swaps, enabling trading without order books or market makers.
These are the primitives. Everything else—yield aggregators, cross-chain bridges, synthetic assets, flash loans—builds on top. The infrastructure layer (blockchains, smart contracts, block explorers) makes it possible. The financial primitives make it useful.
Stablecoins are the connective tissue of DeFi—and the highest-priority target for regulators. The market has grown dramatically: as of January 2025, total stablecoin market cap exceeds $314 billion.2
| Stablecoin | Market Cap | Type |
|---|---|---|
| USDT (Tether) | $182B | Asset-backed |
| USDC (Circle) | $75B | Asset-backed |
| USDS (Sky/Maker) | $9.8B | Over-collateralized |
| USDe (Ethena) | $6.2B | Synthetic |
| DAI | $4.5B | Over-collateralized |
Three models have emerged:
| Type | How It Works | Examples | Risk |
|---|---|---|---|
| Asset-backed | Each token backed by $1 in reserves | USDT, USDC | Counterparty risk—trust the issuer |
| Over-collateralized | Deposit $150+ of crypto to mint $100 of stablecoin | DAI, USDS | Smart contract risk, liquidation risk |
| Algorithmic | Incentives and arbitrage maintain peg, no direct backing | UST (failed) | High—several have collapsed |
Most stablecoins peg to USD at 1:1, though EUR and other currency pegs exist. The dominance of USD stablecoins reflects dollar demand globally—even in "decentralized" finance.3
DEXes trade the protections of regulated brokerages—insurance, dispute resolution, someone to call—for the freedom of permissionless access. You can trade anything, anytime, from anywhere. But if you get hacked, there's no one to make you whole.
This is the deal. Traditional finance protects you from yourself and from bad actors, at the cost of requiring permission. DeFi gives you full control and full responsibility. Neither is objectively better. They serve different needs and different threat models.
Smart contract bugs are common—code is law, including buggy code. Oracle manipulation can drain protocols. Rug pulls happen regularly. Bridge exploits have cost billions—over $2.8 billion stolen in 2022 alone, with bridge hacks accounting for 64% of losses.4 Stablecoins can depeg catastrophically, as UST holders learned when $40 billion evaporated in May 2022.5
Open-source development means more eyes on code, but attackers can study vulnerabilities too. Many protocols are poorly documented. Some are outright scams.
In a permissionless system, there's no customer support to call when things go wrong.
The components exist. They work. Millions of people use them—people who either can't access traditional finance or choose not to trust it.
Remember the opening examples: Canada froze accounts, Cyprus seized deposits, Venezuela inflated savings to nothing. For someone in those situations, the risks of DeFi look different than they do from a stable banking system. Smart contract bugs are scary. So is watching your government drain your account.
The question isn't whether DeFi is safe. It's compared to what.
DeFiLlama aggregate data. TVL peaked at ~$180B in late 2021, crashed to ~$37B in late 2022 following the FTX collapse, Terra/Luna implosion, and Three Arrows Capital bankruptcy. The recovery to $149B by January 2025 reflects both price appreciation and genuine protocol growth. ↩
CoinGecko stablecoin data, January 2025. The market tripled from ~$100B in 2021 to $314B, driven primarily by USDT growth. Tether's dominance (~58% market share) remains a systemic concentration risk. ↩
Non-USD stablecoins (EUR, GBP, etc.) comprise less than 1% of total stablecoin market cap. This reflects both global dollar demand and the practical reality that most DeFi protocols are denominated in USD. ↩
Chainalysis 2023 Crypto Crime Report. Bridge hacks were particularly devastating in 2022: Ronin ($625M), Wormhole ($320M), Nomad ($190M). The concentration of value in bridges creates honeypot dynamics. ↩
Terra/Luna's algorithmic stablecoin UST depegged in May 2022, triggering a death spiral that destroyed approximately $40 billion in value within a week. The collapse also took down Three Arrows Capital and Celsius, demonstrating contagion risk across DeFi. ↩
The building blocks of permissionless finance
In 2022, Canadian authorities froze the bank accounts of trucker protesters. In 2013, Cypriot banks seized up to 47.5% of uninsured deposits overnight. In Venezuela, a lifetime of savings can evaporate in months through hyperinflation.
These aren't edge cases. They're reminders that the financial system most people trust implicitly is built on a foundation of permission—permission that can be revoked.
DeFi offers a different architecture: financial services that run on code, not committees. No account freezes. No bank holidays. No permission required.
Not because institutions are evil, but because removing the need for trust removes the possibility of its violation.
Bitcoin (2009) proved you could move value without intermediaries. But Bitcoin's scripting language is deliberately limited—it settles transactions, not much else.
Ethereum (2015) changed the game by introducing smart contracts: self-executing programs that enable any financial logic to run on-chain. Suddenly you could build a lending market, an exchange, or a stablecoin as code.
The early experiments—MakerDAO (2014), Compound (2018)—remained niche. Then came "DeFi Summer" 2020.
In a few months, total value locked exploded from $1 billion to over $15 billion. Uniswap proved automated market makers could replace order books. Yield farming created new incentive structures. An entire financial system began assembling itself from open-source components—permissionless, composable, 24/7, and global by default.
By January 2025, DeFi TVL had grown to approximately $149 billion—surviving the 2022 collapse that saw it drop to $37 billion following FTX's implosion.1
What does it take to rebuild finance without permission?
Stablecoins bridge between volatile crypto and stable value—tokens pegged to USD that let you hold dollars without a bank. DEXes provide trading 24/7 with no application, no approval, no KYC. Lending protocols let you deposit assets to earn yield or borrow against collateral—capital efficiency without credit checks. Liquidity pools hold paired assets for swaps, enabling trading without order books or market makers.
These are the primitives. Everything else—yield aggregators, cross-chain bridges, synthetic assets, flash loans—builds on top. The infrastructure layer (blockchains, smart contracts, block explorers) makes it possible. The financial primitives make it useful.
Stablecoins are the connective tissue of DeFi—and the highest-priority target for regulators. The market has grown dramatically: as of January 2025, total stablecoin market cap exceeds $314 billion.2
| Stablecoin | Market Cap | Type |
|---|---|---|
| USDT (Tether) | $182B | Asset-backed |
| USDC (Circle) | $75B | Asset-backed |
| USDS (Sky/Maker) | $9.8B | Over-collateralized |
| USDe (Ethena) | $6.2B | Synthetic |
| DAI | $4.5B | Over-collateralized |
Three models have emerged:
| Type | How It Works | Examples | Risk |
|---|---|---|---|
| Asset-backed | Each token backed by $1 in reserves | USDT, USDC | Counterparty risk—trust the issuer |
| Over-collateralized | Deposit $150+ of crypto to mint $100 of stablecoin | DAI, USDS | Smart contract risk, liquidation risk |
| Algorithmic | Incentives and arbitrage maintain peg, no direct backing | UST (failed) | High—several have collapsed |
Most stablecoins peg to USD at 1:1, though EUR and other currency pegs exist. The dominance of USD stablecoins reflects dollar demand globally—even in "decentralized" finance.3
DEXes trade the protections of regulated brokerages—insurance, dispute resolution, someone to call—for the freedom of permissionless access. You can trade anything, anytime, from anywhere. But if you get hacked, there's no one to make you whole.
This is the deal. Traditional finance protects you from yourself and from bad actors, at the cost of requiring permission. DeFi gives you full control and full responsibility. Neither is objectively better. They serve different needs and different threat models.
Smart contract bugs are common—code is law, including buggy code. Oracle manipulation can drain protocols. Rug pulls happen regularly. Bridge exploits have cost billions—over $2.8 billion stolen in 2022 alone, with bridge hacks accounting for 64% of losses.4 Stablecoins can depeg catastrophically, as UST holders learned when $40 billion evaporated in May 2022.5
Open-source development means more eyes on code, but attackers can study vulnerabilities too. Many protocols are poorly documented. Some are outright scams.
In a permissionless system, there's no customer support to call when things go wrong.
The components exist. They work. Millions of people use them—people who either can't access traditional finance or choose not to trust it.
Remember the opening examples: Canada froze accounts, Cyprus seized deposits, Venezuela inflated savings to nothing. For someone in those situations, the risks of DeFi look different than they do from a stable banking system. Smart contract bugs are scary. So is watching your government drain your account.
The question isn't whether DeFi is safe. It's compared to what.
DeFiLlama aggregate data. TVL peaked at ~$180B in late 2021, crashed to ~$37B in late 2022 following the FTX collapse, Terra/Luna implosion, and Three Arrows Capital bankruptcy. The recovery to $149B by January 2025 reflects both price appreciation and genuine protocol growth. ↩
CoinGecko stablecoin data, January 2025. The market tripled from ~$100B in 2021 to $314B, driven primarily by USDT growth. Tether's dominance (~58% market share) remains a systemic concentration risk. ↩
Non-USD stablecoins (EUR, GBP, etc.) comprise less than 1% of total stablecoin market cap. This reflects both global dollar demand and the practical reality that most DeFi protocols are denominated in USD. ↩
Chainalysis 2023 Crypto Crime Report. Bridge hacks were particularly devastating in 2022: Ronin ($625M), Wormhole ($320M), Nomad ($190M). The concentration of value in bridges creates honeypot dynamics. ↩
Terra/Luna's algorithmic stablecoin UST depegged in May 2022, triggering a death spiral that destroyed approximately $40 billion in value within a week. The collapse also took down Three Arrows Capital and Celsius, demonstrating contagion risk across DeFi. ↩