Template-Type: ReDIF-Article 1.0
Author-Name: Sirio Aramonteand 
Author-Name: Wenqian Huang 
Author-Name: Andreas Schrimpf
Title: DeFi risks and the decentralisation illusion
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.
Journal: BIS Quarterly Review
File-URL: http://www.bis.org/publ/qtrpdf/r_qt2112b.pdf
File-Format: Application/pdf
File-URL: http://www.bis.org/publ/qtrpdf/r_qt2112b.htm
File-Format: text/html
Year: 2021
Month: December
Classification-JEL: G18, G23, O39
Handle: RePEc:bis:bisqtr:2112b