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BOC Assesses Innovations, Challenges of DeFi
The Bank of Canada has published a staff note on decentralized finance (DeFi), highlighting its popularity and the challenges and risks associated with its use. DeFi is a multi-layered structure with the Ethereum blockchain as the bottom layer, and developers construct various tools and services on top, including tokenization, lending, and borrowing services.
The note highlights the rise of DeFi ecosystem since 2020 and its significant impact on the crypto economy.
However, its popularity declined in 2022 due to the collapse of key platforms with significant DeFi exposure, including Terra.
The note also praises DeFi’s “composability” and highlights three key areas where DeFi can transform the financial system.
The DeFi ecosystem offers a frictionless financial service offering, reducing frictions in legacy systems. Its open-source nature allows for increased competition, providing better options for end users. Programmable smart contracts eliminate intermediaries, increasing transparency by making everything accessible to those analyzing it. This system also promotes open competition and transparency.
(With inputs from Shikha Singh)
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