With new developments and upgrades taking place on a daily basis, it would not be an over-exaggeration to state that the DeFi space is exploding. Technology, however, comes with its own risks.
Netherland’s ING Bank recently released a paper that analyzed the opportunities and risks associated with DeFi.
The authors looked into how “Centralised institutions could benefit from DeFi’s borderlessness“. The paper highlighted how centralized financial services could consider partnering with decentralized financial services where the expertise of both could be combined. They said,
“Although DeFi currently appears to be a domain on its own, we envision that centralised and decentralised financial services will converge at some stage as both have unique capabilities that are beneficial to the other.”
DeFi legislations may further enhance DeFi adoption globally. If regulators announce favorable legislation with regard to DeFi, the paper stated, it was more likely for financial institutions to adopt it. It further added,
“One glaring area that we see as holding DeFi back from adoption right now is the lack of clarity on where liability lies if a DeFi protocol does not work as intended.”
The paper highlighted how composability was the catalyst for innovation in DeFi. Highlighting the same it said,
“Composability allows DeFi developers to easily connect and re-use existing components on the blockchain to create new financial services.”
Tech entrepreneur and author Andreas Antonopoulos recently took YouTube to assert the same. He said,
“One of the big benefits of doing DeFi in an open platform or open systems way, as we see in Ethereum, is composability… If you need a governance solution, then you use an existing governance token or platform or library that you can incorporate into your smart contracts in such a way that you don’t reinvent the wheel.”
ING chose decentralized lending platform AAVE to carry out its research. The paper further highlighted,
“The biggest difference between AAVE and a traditional bank now is the maturity of unsecured lending. It is uncertain if DeFi protocols are actually in direct competition with banks at all.”
Antonopoulos further said,
“In order to wash out the kind of vulnerabilities of DeFi and improve the maturity of these systems they ought to be tested a number of times in different situations to become more robust.”
Commenting on the paper, ING blockchain lead, Herve Francois, told CoinDesk,
“DeFi could be more disruptive than Bitcoin to the financial sector.”
The paper concluded,
“The best of both worlds is achieved if centralised and decentralised financial services cooperate.”
