Research into central bank digital currencies is growing as governments become more interested in these types of digital assets. By the way, the Bank for International Settlements (BIS) is well known for its regular research on CBDCs. Its researchers recently conducted a study which resulted in the production of a relevant report. The latter addresses the issues of DeFi and TradFi. Here’s what he says about the combination of these two concepts.
Application of DeFi notions to traditional finance
Recently, the World Economic Forum (WEF) released a report on decentralized autonomous organizations. At the same time, the BRI has released a technical document which is complementary to the work of the GEF. The report indicates the extent to which DeFi notions can be applied to traditional finance. The BIS commented on the new working document through a chirp this January 19th
“DeFi is a programmable financial ecosystem that allows users to trade, lend and invest without relying on a central intermediary. This document takes an in-depth look at the underlying technology, its economic potential and associated risks.“, reads the publication.
The BRI working paper presents a so-called DSR model that studies the use of DeFi with TradFi. According to this model, DeFi can be divided into three layers which are interface, application and settlement. The layers are in turn divided into sub-layers across which there is variation between DeFi technologies.
Would DeFi be a big innovation?
The authors of the new BIS report believe it is important to try to combine DeFi and TradFi. They believe it decentralized finance could be very useful to the traditional financial system. They said: “It is not clear whether and to what extent DeFi will proliferate in the future. […] However, we see DeFi as a relevant development, as it leverages innovative technology that could shape the future financial ecosystem.“.
They added: “In-depth knowledge of DeFi is still lacking in many environments“. The BIS researchers stressed that it would take “a specific framework for better practical knowledge of the technology“.
The BIS report discusses the various benefits of decentralized finance, including “competitive financial engineeringWith the working document, some relatively technical aspects of DeFi become more accessible. The report suggests that this technology could facilitate transactions in TradFi.
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Far from dampening my enthusiasm, a failed investment in a cryptocurrency in 2017 only increased my enthusiasm. I therefore decided to study and understand the blockchain and its multiple uses and to convey information related to this ecosystem with my pen.