The Bank of Canada has recently released a staff note on decentralized finance (DeFi), with a report examining the advancements, risks, and challenges associated with DeFi utilization.
According to the note, DeFi operates on a layered structure, with the Ethereum blockchain serving as the foundation upon which developers build various tools and services like tokenization and lending.
The report concluded that DeFi has experienced a decline in popularity following the downfall of multiple significant crypto platforms with substantial DeFi exposure, such as Terra. It acknowledged the benefits of the industry, including its composability, which enables apps and services within the ecosystem to interconnect.
The note highlighted three key areas where DeFi has the potential to revolutionize finance.
Findings show decentralized ledger-based system reduces friction in the traditional system and expands the range of existing financial services.
In addition, open-source nature of DeFi fosters competition by allowing everyone to participate in building and accessing the DeFi ecosystem.
Lastly, the use of programmable smart contracts is believed to enhance system transparency by eliminating intermediaries.