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DeFi risks and the decentralisation illusion

Author

Listed:
  • Sirio Aramonteand
  • Wenqian Huang
  • Andreas Schrimpf

Abstract

Decentralised finance (DeFi) is touted as a new form of intermediation in crypto markets. The key elements of this ecosystem are novel automated protocols on blockchains – to support trading, lending and investment of cryptoassets – and stablecoins that facilitate fund transfers. There is a "decentralisation illusion" in DeFi since the need for governance makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power. If DeFi were to become widespread, its vulnerabilities might undermine financial stability. These can be severe because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers such as banks. Existing governance mechanisms in DeFi would provide natural reference points for authorities in addressing issues related to financial stability, investor protection and illicit activities.

Suggested Citation

  • Sirio Aramonteand & Wenqian Huang & Andreas Schrimpf, 2021. "DeFi risks and the decentralisation illusion," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:2112b
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    References listed on IDEAS

    as
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    2. Claudio Borio, 2019. "On money, debt, trust and central banking," BIS Working Papers 763, Bank for International Settlements.
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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O39 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Other

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