Experts from the Canadian Central Bank described DeFi as a multi-level structure that exists primarily on the Ethereum blockchain. The network is used to create services related to asset tokenization and cryptocurrency lending services. In 2020, DeFi began to grow in popularity and the sector has become an integral part of the crypto economy. However, since 2022, user interest began to decline significantly due to the collapse of several large platforms, including Terra, Celsius and the FTX crypto exchange, the Bank of Canada notes.
Central Bank analysts called the main advantage of decentralized ecosystems “DeFi composability,” which allows services to interact with each other. DeFi makes it possible to seamlessly provide financial services: a decentralized blockchain-based system reduces disagreements between parties and expands the scope of financial services. The DeFi ecosystem also promotes open competition. Thanks to open source, developers can create their own products. Another advantage of DeFi is transparency. The use of programmable smart contracts eliminates intermediaries and increases the openness of the system.
At the same time, the regulator pointed out the problems and risks associated with DeFi, noting: despite the innovations and opportunities, the overall economic benefits of DeFi remain limited. The Central Bank listed the main problems that the DeFi sector is currently facing. First of all, there is limited tokenization: only tokenized assets can be recorded on the blockchain and interact with smart contracts. Currently, the share of tokenized real assets is small, so the contribution of tokenization to the real economy remains minimal for now.
The Bank of Canada has noted frequently discovered vulnerabilities in DeFi projects, leading to an increase in hacks. While DeFi strives to eliminate centralized intermediaries, the need to manage private keys makes it difficult for retail users to participate in the DeFi ecosystem. The result is the emergence of centralized, opaque and unregulated intermediaries, so-called centralized finance (CeFi) platforms. They also offer financial services using crypto assets, but differ from DeFi in that they are run by people rather than smart contracts. This exposes client funds to risks due to a lack of transparency.
The researchers called on regulators and legislators to create guidelines for regulating DeFi that would promote innovation and protect users from risks.
According to a recent Bank of Canada study, the share of cryptocurrency owners in the country decreased from 13.1% to 10% in 2022. In August, the central bank said it saw no need to launch its own digital currency.
Source: Bits
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