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The report by BIS explains why the decentralization in DeFi is a myth or illusion and reveals a principal reason for these concerns.
The Bank for International Settlements or BIS, also known as the central bank of central banks in the European region voiced its concerns against the growing popularity of DeFi. The report gives a detailed explanation of the DeFi ecosystem, its enablers, building blocks, challenges and concerns. You can visit the BIS website to read the full report on the inherent risks posed by DeFi .
DeFi is slowly taking root in the cryptocurrency market with the aim to offer traditional financial products without any intermediary like banks. It refers to financial applications that run on the blockchain through a series of smart contracts. The reasons why it is gaining confidence and popularity are its digitization and automation aspects that make it future-proof and the sense of anonymity it will offer when compared to the other financial systems.
Important DeFi Observations Outlined in the BIS Report
The report by BIS explains why the decentralization in DeFi is a myth or illusion and a principal reason for their concerns. Agustin Carstens, general manager of the BIS, highlighted the system’s illusory nature. He spoke about the future possibility of agents emerging within the DeFi ecosystem and the fact that this could be against the interests of the users of DeFi.
Focusing on the illusory decentralization feature purported by DeFi enthusiasts, the BIS had important comments to make based on key economic principles or tenets and vital DeFi features leading to the concentration of power in the hands of those investors who own large shares of coins in the market.
The BIS opined that under such circumstances and to avoid the increase in vulnerabilities such as highly leveraged trades, lack of shock absorbers and liquidity issues, the DeFi must be regulated by well-defined policies so that investors and users of these financial services are protected and their trust on the market amplifies. The role of authorities in this scenario becomes important and Carstens doesn’t want them to get complacent. To avoid the risk of financial instability, DeFi needs some amount of centralization.
Surprisingly, many in the crypto world do not see the probability of regulations around DeFi as a problem. Such frameworks would ensure investor protection and direct access to the mainstream market. Today, almost $100 billion worth of assets houses Ethereum-based DeFi protocols as per a research firm. Due to the promise of higher returns on traditional products like savings and loans, more and more investors are getting attracted to DeFi services. However, here in comes the risks associated with financial frauds and hacks. A report from Elliptic, a blockchain analytics firm, brings to the fore startling statistics in relation to DeFi scams. Owing to these hackers and fraudsters, over $10 billion loss has been experienced in 2021.
The Central Bank of Central Banks or BIS is an international financial institution that works to facilitate monetary and financial stability through efforts targeted at aligning the monetary policies across the different Central Banks. Apart from enabling coordination, the Bank for International Settlements also offers banking services to financial establishments like engaging in short-term collateralized loans and gold transactions, etc.