What exactly is DeFi?

14 Apr 2022

In the crypto world, "blockchain finance" is a catch-all phrase for the efforts to establish a new, internet-native financial system that does away with conventional financial intermediaries and trust mechanisms.

This gives rise to DeFi, which stands for "decentralized finance."

Crypto-native refers to blockchains to replace conventional intermediaries and trust mechanisms to create a new, internet-native financial system.

Is there a reason why so many people are concerned about DeFi?

In other words, DeFi is unregulated primarily and lacks many of the conventional banking system's consumer protections and safeguards.

Can you give me an example of anything that would be controlled in the conventional financial system but isn't regulated in the DeFi system?

Stablecoins are perhaps the most acceptable illustration. These are digital currencies whose value is linked to the value of a fiat currency, such as the U.S. dollar.

Fraudsters have their sights set on DeFi, as they have on all of crypto. According to blockchain analytics company, Elliptic, hacking and frauds in DeFi projects will cost more than $10 billion in 2021.

Victims of DeFi scams generally have little recourse. 

On the other hand, Crypto tokens can't be replaced or recovered after they've been lost or stolen, unlike bank deposits, which the Federal Deposit Insurance Corp protects.

Would DeFi bring on a new financial catastrophe?

It is doubtful that DeFi would cause another financial catastrophe of the magnitude of 2008. 

However, even if it's a minor part of the crypto world (a tiny part of the larger economy), many of those putting their money into DeFi are investors with huge pockets who can afford even significant losses.

On the other hand, regulators aren't blind to the idea that DeFi may become large enough to pose a systemic concern.

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I think this area will be subject to a lot more regulatory scrutiny in the future... it has literally been free for all in the past
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