Wednesday, January 19

“Decentralization in DeFi is an illusion,” says BIS

The DeFi (decentralized finance) sector was harshly criticized by the BIS on Monday, which said there was an “illusion of decentralization” in these systems. The DeFi sector is still a field of study in the cryptocurrency market, having a good time with innovative solutions.

However, these are direct threats to banking institutions around the world, as its centralized investment solutions, such as CDBs, among other products, not even for protection against inflation.

In this sense, cryptocurrencies emerged with decentralized investment applications that can be fairer in the distribution of returns to “shareholders”, since the entire process is transparent and simple to be carried out.

The fear of central banks seems to be that the world population will understand these systems and stop using centralized applications under their control.

“DeFi is an illusion of decentralization”, says the central bank of central banks BIS

Since DeFi emerged in the cryptocurrency market, mainly in the Ethereum, Binance Smart Chain and Solana networks, many investors have come to see an immense potential to monetize their money.

These solutions allow people to borrow cryptocurrencies for protocols, earning a reward for doing so, which is typically above the conventional investment market.

Now afraid of decentralized solutions, central banks like Brazil already want to create “DeFi” solutions with their digital currencies, CBDCs, like Real Digital.

But the central bank of central banks, the BIS, has published a study this Monday (6) calling the DeFi of cryptocurrencies an illusion of decentralization. The reason for this is the fear that decentralized finance will spread and hinder the so-called financial stability, a term that means that the economy is stable and with low volatility.

“There is an ‘illusion of decentralization’ in DeFi, as the need for governance makes some level of centralization inevitable and the structural aspects of the system lead to a concentration of power. If DeFi spreads, its vulnerabilities could undermine financial stability. This can be serious due to high leverage, liquidity mismatches, built-in interconnection and lack of buffers such as banks.”

DeFi grows with funding and uses of stablecoins, but centralization is needed

According to the BIS, centralization is needed at some level, another important foundation that would place DeFi as the illusion of decentralization.

But the sector is growing all over the world, which led the BIS to identify the main use cases in this sector.

“The DeFi ecosystem revolves around two elements: (i) new protocols for trading, lending and investing, and (ii) stable currencies, which are cryptoactives that facilitate transfers of funds and aim to maintain a fixed face value in relation to fiat currencies, mainly the US dollar.”

The use of DeFi solutions exploded in 2021, with the Tether cryptocurrency being the biggest presence in this sector, according to data released by the BIS.

DeFi growth according to BIS /Reproduction

Regarding industry risks, the BIS said that DeFi emerged to be a competitor to the traditional market, but that today the industry has few use cases. In this way, the “DeFi’s vulnerabilities are severe due to high leverage, liquidity mismatches, built-in interconnection and lack of shock-absorbing capacity.“.

The report proposes that regulators around the world regulate DeFi urgently, to prevent problems in this sector.

According to a recent report by Chainalysis, Brazil is one of the main countries in this DeFi sector, which should soon attract rules to the sector.