DeFi allows for the innovation of new demands. But decentralized demands retain the exact difficulty as all recent markets: adoption is essential to develop liquidity and liquidity authorizes for expanded adoption. Stretch decentralized finance can develop new demands and allow recent users to entry them, it performs nothing automatically created fluid demands.
Decentralized Finance: The Risks
In a decentralized financial system, an internet connection would be the only prerequisite for accessing financial services. A reduction in centralization of who controls the current financial infrastructure would increase transparency, reduce costs and reduce censorship. Unbanked people who do not have an account with a bank or do not use the services offered by banks would gain access to financial services. In fact, ” open finance ” is often used as a synonym for DeFi decentralized website.
The main problem is that technology is not the only factor limiting access to financial services. It is unreasonable to believe that retail investors understand the risk profile of simpler DeFi products and solutions, when often they do not fully understand even traditional financial products and instruments.
Another problem is product-market fit (PMF) currently limited to early adopters and savvy cryptocurrency users who are comfortable with the current interfaces and interactions offered by DeFi. Furthermore, the lack of education and developer tools are limiting the growth of the industry. If the current limitations on adoption and the growth of decentralized finance are to be overcome, developers, regulators, investors and users will have to talk and work together. Breaking down conceptual barriers.
What do banks think about decentralized finance?
The Financial Stability Board is an international body tasked with monitoring the financial system globally. Major central banks are part of it and in June 2019, they published a report on decentralized finance. The report states that decentralized finance can be effective especially with regard to payments and trade finance. Trade finance concerns national and international commercial transactions and includes credit lines, the issuance of documentary credits, solutions for the management and hedging of export credit risk, etc.
Among the most interesting points:
Decentralization of the decision-making process. Moving away from a single financial intermediary or infrastructure and adopting systems where a large group of users are able to make decisions about whether and how to carry out financial transactions. Decentralization of risks. Moving from preserving risk on the balance sheet of a single financial intermediary to a more direct correspondence between individual users and financial service providers.
Decentralization of record keeping. Moving away from centrally stored data and transactions to systems where the ability to store and access data is extended to a larger number of users. Verification of data and transactions can be distributed, for example through consensus mechanisms.