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Do we still need financial intermediation? The case of decentralized finance – DeFi

Author

Listed:
  • Laura Grassi
  • Davide Lanfranchi
  • Alessandro Faes
  • Filippo Maria Renga

Abstract

Purpose - Decentralized finance (DeFi), enabled by blockchain, could bring about a new financial system, where peers will interact directly, with little or no place for traditional intermediation. However, some crucial tasks cannot be left solely to an algorithm and, consequently, most DeFi applications still require human decisions. The aim of this research is to assess the role of intermediation in the light of DeFi, analysing how humans and algorithms will interact. Design/methodology/approach - The authors based their work on a twofold qualitative methodology, first analysing publicly available secondary data, particularly from white papers and DeFi Pulse (a website providing data on DeFi solutions) and then running two focus group discussions. Findings - DeFi does not eliminate financial intermediation, but enables it to be performed in new ways, where decentralization means that no single entity can hold too much power or monopoly. DeFi has, however, inherited risks from the underlying technologies that unintentionally facilitate illegal behaviour and can hamper the authorities’ supervision. The complex duality algorithm- vs human-based actions will not be solved indisputably in favour of the former, as DeFi solutions can range from requiring algorithms to play a dominant role, to enabling greater human interaction by actively involving more people. Originality/value - This research contributes to the emerging debate between algorithm- and human-based intermediation, especially in relation to the standing literature on financial intermediation, where considerations made in the light of the newest theories on blockchain and DeFi are still scarce.

Suggested Citation

  • Laura Grassi & Davide Lanfranchi & Alessandro Faes & Filippo Maria Renga, 2022. "Do we still need financial intermediation? The case of decentralized finance – DeFi," Qualitative Research in Accounting & Management, Emerald Group Publishing Limited, vol. 19(3), pages 323-347, February.
    • Handle: RePEc:eme:qrampp:qram-03-2021-0051
    DOI: 10.1108/QRAM-03-2021-0051
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    Citations

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    Cited by:

    1. Qiao, Xingzhi & Zhu, Huiming & Tang, Yiding & Peng, Cheng, 2023. "Time-frequency extreme risk spillover network of cryptocurrency coins, DeFi tokens and NFTs," Finance Research Letters, Elsevier, vol. 51(C).
    2. Tim Weingärtner & Fabian Fasser & Pedro Reis Sá da Costa & Walter Farkas, 2023. "Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance," JRFM, MDPI, vol. 16(10), pages 1-25, October.
    3. Ravi Kashyap, 2023. "DeFi Security: Turning The Weakest Link Into The Strongest Attraction," Papers 2312.00033, arXiv.org.
    4. Umar, Zaghum & Polat, Onur & Choi, Sun-Yong & Teplova, Tamara, 2022. "Dynamic connectedness between non-fungible tokens, decentralized finance, and conventional financial assets in a time-frequency framework," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).

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