Bìznes Inform (Mar 2024)
Decentralized Finance: Principles of Functioning, Infrastructure, Risks
Abstract
The article analyzes the differences between centralized and decentralized exchanges in the cryptocurrency market. The author notes the impact of bankruptcies of centralized representatives who provided services in the cryptocurrency market on the interaction of users with decentralized finance instruments. The publication considers the key representatives of decentralized finance, their capitalization, available capital, and technological developments. It substantiates the advantages and risks of using decentralized finance instruments and studies the differences between centralized, decentralized, and algorithmic stablecoins. To assess the capitalization of decentralized finance instruments, the asset value indicator TVL (Total Value Locked) is used. TVL represents the amount of assets currently placed in a particular decentralized finance instrument or protocol. The RWA narrative is significant in the crypto space as it demonstrates increased interconnectedness. DeFi, previously isolated from TradFi, has now become an integral part of a more holistic financial ecosystem. Blockchain technology has demonstrated its potential for transformation through real-world use cases. Real-world assets (RWAs) are an attractive option due to the large traditional finance market. While they offer benefits such as portfolio diversification and enhanced returns, it is crucial to mitigate default risk. Platforms like Goldfinch have a proven track record. Tokenizing RWAs can increase market participation and financial inclusivity. The study's results indicate significant development of decentralized finance instruments over the past three years. This is evidenced by the amount of capital invested in these instruments and the number of users, despite the technological and regulatory risks associated with them. The study's conclusions indicate that despite the technological novelty, users are increasingly interested in interacting with decentralized finance instruments. However, users face difficulties in understanding how these instruments work and in gaining experience with these products. The comparative analysis by Saif Ahmed Abdulhakeem and Qiuling Hu titled "CeFi vs. DeFi — Comparing Centralized to Decentralized Finance" systematically contrasts Centralized Finance (CeFi) with Decentralized Finance (DeFi) across legal, economic, security, privacy, and market manipulation dimensions. It aims to provide a structured approach for distinguishing between CeFi and DeFi services, emphasizing DeFi's transparency and user control advantages. However, unresolved issues in decentralized finance, such as regulatory frameworks and risk assessment, necessitate further research. The study also underscores the importance of improving user experience design and overcoming adoption challenges for DeFi. In their academic discourse titled "Powered by Blockchain Technology, DeFi (Decentralized Finance) Strives to Increase Financial Inclusion of the Unbanked by Reshaping the World Financial System," Abdulhakeem and Hu analyze DeFi's potential to enhance financial inclusion for the unbanked. They highlight the pivotal role of blockchain, particularly Ethereum, in enabling DeFi. While acknowledging DeFi's decentralization benefits, the article suggests it as a complement rather than a replacement for traditional finance. It advocates for future research on integrating DeFi with global banking systems and improving user interface and security. Overall, while recognizing DeFi's transformative potential, the article underscores the need for ongoing research to address challenges and integrate DeFi into mainstream finance seamlessly.
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