Decentralised finance: the latest generation of crypto-assets

Abstract

Rationale This article is intended as an introduction to the world of decentralised finance (DeFi). To this end, the focus is to explain, in a simplified manner, its key characteristics and most common use cases, along with the main risks. Takeaways •DeFi is one of the latest developments in the crypto-asset space and also the segment where most of the recent bouts of sector turmoil have taken place. It is a complex, but still largely endogenous, ecosystem and therefore its interaction with the real economy is limited. •DeFi is actually less decentralised than it purports to be. Its real benefits are limited, while the potential risks are considerable. Although the risks are not substantially different from those in the traditional financial sector, their drivers, speed of propagation and scale can differ entirely, compromising the authorities’ room to manoeuvre. •Although the policy and regulatory effort is, for now, focused on traditional crypto-assets, there is a growing debate as to what mix of measures would best contribute to mitigating the risks of DeFi. More specific action in this regard is expected in the years ahead.