On Monday, the Bank for International Settlements (BIS), a financial institution owned by global central banks, Publish A report reviewing the development of the decentralized finance or DeFi industry. The article started by saying: “DeFi has a’decentralization illusion’, because the need for governance makes a certain degree of centralization inevitable, and the structural aspects of the system lead to concentration of power.” It continued:
“If DeFi becomes widespread, its fragility may undermine financial stability. Due to high leverage, liquidity mismatch, internal interconnection, and lack of shock absorbers such as banks, these problems may be serious.”
According to BIS, all DeFi agreements have inherent centralized elements due to their central governance framework, similar to legal entities such as companies. In addition, some DeFi blockchains concentrate power in the hands of large token holders or insiders who sell tokens.
Cryptocurrency and traditional finance | Source: Bank for International Settlements
The report criticized the high leverage from DeFi trading and lending platforms, such as Binance’s margin at one time exceeding 100 times. It also outlines the fragility of stablecoins, which are characterized by opacity and lack of supervision, Plus liquidity issues with Market risk, which may lead to bank runs by investors This causes them to be far below face value in a short period of time.
The growth of cryptocurrency activity | Source: Bank for International Settlements
The report said: “At present, it is mainly geared towards speculation, investment and arbitrage of encrypted assets, rather than real economic use cases.”
“In general, the main premise of DeFi-reducing the rents of centralized intermediaries-does not seem to have been realized.”