Source: https://www.linkedin.com/feed/update/urn%3Ali%3Ashare%3A6877932628234784768
DeFi = Decentralization Illusion: Bank for International Settlements – BIS Quarterly Review, December 2021:
#DecentralizedFinance #DeFI #Crypto #BlockChain
#DeFi #Risks: #Decentralization #Illusion: https://lnkd.in/dAEaCHPq: PDF: https://lnkd.in/dbGhHdN7:
‘Decentralised finance (DeFi) is touted as a new form of #intermediation in #crypto #markets. The key elements of this #ecosystem are novel #automated #protocols on #blockchains – to support #trading, #lending & #investment of #cryptoassets – & #stablecoins that facilitate #fund #transfers. There is a decentralisation illusion in DeFi since the need for #governance makes some level of #centralisation inevitable and #structural aspects of the system lead to a #concentration of #power. If DeFi were to become widespread, its #vulnerabilities might undermine #financial #stability. These can be severe because of #high #leverage, #liquidity #mismatches, built-in #interconnectedness and the #lack of #shock #absorbers such as #banks. Existing #governance #mechanisms in DeFi would provide natural reference points for addressing issues related to #financial #stability, #investor #protection and #illicit #activities.’
#FutureOfCrypto #ProofOfStake #Power #Concentration
First and foremost, centralised governance is needed to take strategic and operational decisions. In addition, some features in DeFi, notably the #consensus #mechanism, favour a concentration of power.
#Speculation vs #Investment #Risks
DeFi has the potential to complement traditional financial activities. At present, however, it has few real-economy uses and, for the most part, supports #speculation and #arbitrage across multiple #cryptoassets.
DeFi would need to satisfy a number of conditions if it is to become a widely used form of #financial #intermediation. For one, #blockchain #scalability and large-scale #tokenisation of #traditional #securities would need to be improved. No less importantly, DeFi will need to be #properly #regulated. Public authorities would need to interface with DeFi’s inherent governance structures, so as to ensure sufficient #financial #stability safeguards as well as to enhance #trust by addressing #investor #protection issues and #illegal #activities.
This special feature examines DeFi mainly from a #financial #stability perspective, drawing attention to #vulnerabilities that stem from #leverage and #liquidity #mismatches. As a key attribute of #crypto #markets, leverage amplifies their #volatility and #procyclicality. In addition, the #crypto #ecosystem lacks internal shock absorbers, such as banks, that can provide #liquidity at times of #stress. This increases the potential for #stablecoin #runs that could sever links across #investors and #platforms, eroding the #networked #liquidity that is a defining feature of DeFi.
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