St. Louis says decentralized finance (DeFi) “Unleashed a wave of innovation”that could, in a few years’ time, create a more transparent financial infrastructure around the world.
St. Louis supports DeFi
In quarterly review Fed branch market from St. Louis Fabian Schär, professor of distributed ledger technology and fintech at the University of Basel in Switzerland, highlights both the potential and the risks associated with DeFi.
Schär also claims that DeFi smart contracts reduce counterparty credit risk and increase the efficiency of financial transactions. He also adds that the transparency of DeFi applications can be provided by readily available data, which can in turn help prevent various undesirable financial events in the future.
In addition, the professor notes that DeFi could open up the financial system to the entire world:
By default, DeFi protocols can be used by anyone. As such, DeFi has the potential to create a truly open and accessible financial system. In particular, the infrastructure requirements are relatively low and the risk of discrimination is almost non-existent due to the lack of identity.
Despite its great potential, DeFi Schär also says the sector is exposed to several risks that people should be aware of. Smart contracts can contain errors that put funds at risk of being hacked. Broken admin keys can violate smart contracts, and high transaction fees and long transaction confirmation times can benefit wealthy people and harm the DeFi ecosystem.
Schär also argues that the term “decentralized” can be confusing:
Many protocols and applications use external data sources and special administrator keys to manage the system, update smart contracts, and even perform emergency shutdowns. While this is not necessarily a problem now, users should be aware that in many cases there is a lot of trust involved.
However, if these issues are addressed, DeFi could lead to a paradigm shift in the financial industry and potentially create a more robust, open and transparent financial infrastructure.