The decentralized finance (DeFi) ecosystem is structured as a multi-layered stack. At the base is a settlement layer, typically a blockchain platform like Ethereum, which provides the foundational distributed ledger. Built on top of this is an asset layer, comprised of native cryptocurrencies as well as fungible and non-fungible tokens. Various DeFi applications, such as decentralized exchanges, lending and borrowing platforms, derivatives markets, and asset management tools, then operate on this underlying blockchain infrastructure.

A key feature of this DeFi stack is the concept of atomic settlement – transactions either execute fully or fail completely, ensuring the integrity of the system. DeFi services also leverage well-defined token standards and utilize market mechanisms like arbitrage to maintain price consistency across the different DeFi applications and markets.

However, unlike the highly regulated traditional finance (TradFi) sector, the DeFi ecosystem operates in a largely unregulated space. This has enabled a proliferation of market manipulation techniques, from front-running to pump-and-dump schemes, that DeFi researchers are actively studying and working to mitigate.

At the same time, DeFi is becoming increasingly intertwined with centralized finance (CeFi), particularly through the use of stablecoins that flow between the two domains. Notably, some of these stablecoins can be partially censored or even have user funds destroyed by their issuers, blurring the lines between the decentralized and centralized financial worlds. As the DeFi ecosystem continues to evolve, navigating this complex interaction between the two spheres will be a key challenge.