Federal Reserve Bank of St Louis: DeFi May Lead to Paradigm Shift in Financial Industry

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by Steve Muchoki · 3 min read
Federal Reserve Bank of St Louis: DeFi May Lead to Paradigm Shift in Financial Industry
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The report by the Federal Reserve Bank of St Louis recognized Ethereum as the leader in the smart contract aspect with the majority of the DeFi protocols built on it.

The Federal Reserve Bank of St Louis published research by Dr Fabian Schär on May 2 regarding the decentralized financial (DeFi) ecosystem and its impact on the financial industry. According to the research, the DeFi ecosystem may trigger a huge change in the financial sector.

“DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure,” the report noted.

In his report, Fabian noted that the decentralized financial ecosystem deploys the smart contract concept that is more open and reliable than the traditional banking system.

“DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way,” Dr. Schär wrote.

Federal Reserve Bank of St Louis Report on DeFi

The report by the Federal Reserve Bank of St Louis recognized Ethereum as the leader in the smart contract aspect with the majority of the DeFi protocols built on it. However, other competitive blockchains offer smart contract services at a negligible fee in comparison to what the Ethereum network offers. One is the RSK network that uses the Bitcoin network to secure smart contracts, and the other notable one is the Binance Smart Chain that uses BNB as the native coin.

However, Ethereum remains the leader in the decentralized financial ecosystem being the pioneer, whereby notable Defi projects including Uniswap runs on the mainnet. Schär, a professor of Distributed Ledger Technology at the University of Basel in Switzerland, stated that Ethereum has unleashed a wave of innovation built on blockchain technology.

According to him, the sustained growth in the Defi ecosystem and its related coins indicates more is on the way. “The spectacular growth of these assets alongside some truly innovative protocols suggests that DeFi may become relevant in a much broader context and has sparked interest among policymakers, researchers, and financial institutions,” the report noted.

The total value locked in the defi sector according to metrics provided by Defi Pulse is approximately $76.2 billion at the time of reporting. In the decentralized financial ecosystem, it is divided into the lending sector, the decentralized exchanges sector, the derivatives field, and the payment sector.

Overall, Maker leads the pack with $11.97 billion locked assets, followed closely by Aave, Compound, and Uniswap with $11.10 billion, $9.78 billion, and $7.49 billion respectively.

Notably, the DeFi space has seen a seven-fold increase over the past year.

More institutional investors led by popular crypto venture capitalists have been investing in the Defi sector and reinventing the financial wheel.

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