Decentralized Finance

"Decentralized Finance (DeFi) is a competitive, contestable, composable and non-custodial financial ecosystem built on technology that does not require a central organization to operate and that has no safety net. It consists of financial protocols — implemented as “smart contracts” — running on a network of computers to automatically manage financial transactions. Implemented on top of DLT, it does not require banks or other traditional centralized intermediaries. The underlying ecosystem is competitive as novel intermediaries — miners or validators — compete to process and settle transactions. Users can choose from different financial protocols; these are contestable as anyone can become an intermediary or deploy a protocol or even start a new ledger; composable as complex services can be assembled from basic protocols; and non-custodial as users can keep direct custody of their assets when accessing financial services. DeFi does not come with any safety net as it lacks protection from criminal conduct or investor fraud and erroneous transactions cannot be undone".

Source: https://www.bis.org/publ/work1066.pdf

By: Raphael Auer, Bernhard Haslhofer, Stefan Kitzler, Pietro Saggese, and Friedhelm Victor for Bank for International Settlements

The Technology of Decentralized Finance (DeFi).pdf

Download PDF • 905KB