Arguably the cornerstone of the fintech revolution, decentralized finance (DeFi) has spurred a wave of innovation in how individuals and organizations trade, invest, and work in the modern era. However, the speed at which DeFi has upended the financial world has been a cause for alarm for some regulatory institutions.
Case in point: at the February meeting of the G20 Finance Ministers and Central Bank Governors, the United States Financial Stability Board (FSB) delivered a study on DeFi that identified numerous issues that could prove inimical to markets in the near future. The authors of the study called for greater examination of DeFi by regulatory boards, particularly about linkages between DeFi and traditional financial bodies (TradFi).
“Operational fragilities include unclear, opaque, untested or easy-to-manipulate DeFi governance frameworks, where the actual degree of decentralization varies broadly,” the study’s authors wrote, going on to name several more potentially lethal vulnerabilities of DeFi. “Arguably the most concerning vulnerabilities in DeFi relate to the different liquidity and maturity profile of liabilities and assets of relevant entities.”