One of twelve reserve banks in the U.S., the Federal Reserve Bank of St. Louis, has published a detailed and unbiased report to cover the merits and demerits of the rapidly developing sector of decentralized financial protocols (DeFis). In general, researchers are optimistic about DeFi's prospects in the modern financial system.
Blocks and types of DeFis
Fabian Schär, the professor of distributed ledger technologies and fintech at the University of Basel who authored this report, introduces DeFi as a part of the global blockchain-based infrastructure. According to Schär, DeFis exist in five layers: settlements, assets, protocols, applications and aggregators.
In terms of tokenized assets and decentralized exchanges, Ethereum (as a token and as a platform) retains supremacy.
Other use cases for decentralized finance include decentralized lending platforms, decentralized derivatives trading ecosystems and on-chain asset management tools.
Great potential, certain risks
The research underlines that DeFi instruments provide modern economic institutions with plenty of opportunities. The most notable advantages of decentralized financial protocols include efficiency, transparency and accessibility.
Also, due to the high composability of interoperable DeFi environments, these instruments have unparalleled composablity: analysts compare them with "Lego pieces."
On the other hand, modern DeFi protocols pose certain risks, including lack of operational reliability, rich opportunities for illicit activities and problems with external data broadcasting.
All in all, the impact of DeFi's progress on modern finance is going to be revolutionary, according to the seasoned researcher:
...DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure.
As covered by U.Today previously, the American FinCEN was forced by the crypto community to expand the "comments term" on its proposal that would be harmful for the interaction between CeFi and DeFi.