This review explores the evolution and characteristics of decentralized finance (DeFi) ecosystems, emphasizing their potential to transform traditional finance (TradFi). DeFi leverages blockchain technology and decentralized networks to offer secure, transparent, and accessible financial services, including lending, borrowing, asset management, and decentralized exchanges. As of January 2023, the DeFi market had a capitalization of $46.21 billion and served over 6.6 million users. DeFi provides benefits such as reduced fees, increased inclusivity, faster transactions, and enhanced security, while eliminating intermediaries. However, it faces challenges related to user awareness, regulatory compliance, and risk management. The paper develops a DeFi classification system to enhance understanding of its taxonomy, aiming to provide clarity on its various aspects and their interconnections. This taxonomy helps experts, regulators, and decision-makers make informed choices, promoting responsible integration of DeFi into TradFi for effective risk management. The study also highlights the role of smart contracts in automating financial transactions and ensuring security and transparency in DeFi. Additionally, it discusses the importance of tokenization in digitizing real-world assets and enhancing market efficiency. The research compares DeFi with TradFi, noting that while DeFi offers advantages such as transparency, disintermediation, and programmability, it cannot fully replace TradFi due to its established regulatory framework and infrastructure. The paper also addresses the role of peer-to-peer transactions, the significance of DeFi market mechanisms, and the impact of DeFi on financial inclusion and market efficiency. The study concludes that DeFi has the potential to reshape the financial landscape, but its adoption requires addressing challenges related to user education, regulation, and risk management. The DeFi taxonomy developed in this study provides a structured framework for understanding and analyzing the DeFi ecosystem.This review explores the evolution and characteristics of decentralized finance (DeFi) ecosystems, emphasizing their potential to transform traditional finance (TradFi). DeFi leverages blockchain technology and decentralized networks to offer secure, transparent, and accessible financial services, including lending, borrowing, asset management, and decentralized exchanges. As of January 2023, the DeFi market had a capitalization of $46.21 billion and served over 6.6 million users. DeFi provides benefits such as reduced fees, increased inclusivity, faster transactions, and enhanced security, while eliminating intermediaries. However, it faces challenges related to user awareness, regulatory compliance, and risk management. The paper develops a DeFi classification system to enhance understanding of its taxonomy, aiming to provide clarity on its various aspects and their interconnections. This taxonomy helps experts, regulators, and decision-makers make informed choices, promoting responsible integration of DeFi into TradFi for effective risk management. The study also highlights the role of smart contracts in automating financial transactions and ensuring security and transparency in DeFi. Additionally, it discusses the importance of tokenization in digitizing real-world assets and enhancing market efficiency. The research compares DeFi with TradFi, noting that while DeFi offers advantages such as transparency, disintermediation, and programmability, it cannot fully replace TradFi due to its established regulatory framework and infrastructure. The paper also addresses the role of peer-to-peer transactions, the significance of DeFi market mechanisms, and the impact of DeFi on financial inclusion and market efficiency. The study concludes that DeFi has the potential to reshape the financial landscape, but its adoption requires addressing challenges related to user education, regulation, and risk management. The DeFi taxonomy developed in this study provides a structured framework for understanding and analyzing the DeFi ecosystem.