“DeFi can Turn Traditional Financial System Upside Down” – Federal Reserve Research Paper

Recently, the Federal Reserve Bank of St Louis did research on the potential of decentralized finance and the role that Ethereum has in its expansion. The paper was penned by Dr. Fabian Schär, a professor of Distributed Ledger Technology at the University of Basel in Switzerland. 

Security Concerns & Risks – The DeFi Roadblocks 

The research paper by Dr. Fabian Schär was published on May 2 and it focuses on the impact that DeFi will have on the traditional financial ecosystem. Dr. Fabian Schär argues that once the DeFi space gets its house in order by addressing the security concerns and risks, it will become a force to reckon with. 

If we look at the data regarding DeFi hacks, we find that a total of $150 million was lost to DeFi hacks in 2020, which is a substantial amount. In fact, 20% of all hacks in the crypto space can be attributed to the DeFi space. It proves that the concerns around DeFi are not unfounded. 

A sea of Change is Imminent in Financial System 

Yet, none can deny the huge potential of DeFi, one of the hottest parts of the crypto world today. In the paper, Fabian Schär appreciated DeFi for all it stands for, saying:

“DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way.”

Dr. Fabian Schär also wrote in the paper that DeFi will make the current financial system open, transparent, and robust, the much-needed features for financial infrastructure in the 21st century. The old ways won't work for long. While discussing the role that DeFi will play in the financial industry, the paper mentions:

“DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure.”

DeFi's Explosive Growth

With 700% growth in total locked-in value, DeFi has surpassed even the best of expectations. The current figure of DeFi locked-in value stands over $134 billion, which is a humongous figure. Such a monumental growth depicts the clear picture of the change that is underway. So, where does the DeFi space stands in terms of the number of users? 

A recent ConsenSys report says that the current number of DeFi users stands to 1.75 million. Whereas, the number of MetaMask users stands at 5 million. Considering MetaMask is the go-to Web3 wallet for DeFi users, there is a potential of three-time growth in the number of DeFi users. 

Smart Contracts, the Backbone of DeFi Protocols 

Drawing attention to smart contracts in the paper, Dr. Schär explained that smart contracts play an integral role in the success of DeFi protocols. The smart contracts, in turn, rely on Ethereum mostly. 

Other research reports on DeFi, too, show that Ethereum is the go-to blockchain network for building DeFi solutions. As for the most common collateral in the DeFi space, Ethereum leads here as well, with 9% of Ethereum's entire supply locked in DeFi protocols. It amounts to a total of 10.5 million ETH. 

The Cocktail for DeFi's Further Success 

Dr. Fabian Schär discusses in the paper that with further growth and adoption of digital assets like Ethereum, DeFi will make further inroads in the traditional financial ecosystem. In the process, DeFi will start gaining market share over the traditional financial players:

“The spectacular growth of these assets alongside some truly innovative protocols suggests that DeFi may become relevant in a much broader context and has sparked interest among policymakers, researchers, and financial institutions.”

The last few months have been phenomenal for Ethereum helping ETH touch its all-time high of $3500. A research paper from the Federal Reserve will add further to its momentum.