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BIS proposes research model to check DeFi’s integration with TradFi and its risks

The Bank for International Settlements checked out decentralized finance (DeFi) in a latest working paper and introduced a DeFi stack reference model (DSR) for example the technology’s functionality and risks. The report discusses the mixing of DeFi with traditional finance and suggests ways to evaluate the risks related to this integration.

Paper examined architecture, technical primitives and functionalities of DeFi protocols in considerable technical detail. “A deep understanding of DeFi remains to be lacking in lots of circles,” the authors wrote, “which requires a selected framework for higher hands-on understanding of the technology.”

The effort pays off, the article argued, attributable to DeFi’s innovation:

“It remains to be unclear if and to what extent DeFi will spread in the long run. […] Nevertheless, we consider DeFi to be a crucial development because it uses progressive technology that has the potential to shape the long run financial ecosystem.”

Algorithmic automation, “competitive financial engineering” and transparency “are of interest far beyond the cryptocurrency markets,” the article reads. By competitive engineering, the authors meant composability, combining smart contracts to create complex and unique financial products.

The DSR model divides DeFi into three layers: interface, application and settlement, with sublayers allowing for the differentiation seen in DeFi technologies. The article uses various tokens, blockchains, and financial services in its examples. The Raid on Terra (LUNA) has been discussed intimately attributable to its informative value and for instance of the effectiveness of the authors’ research technique.

Related: Bank for International Settlements to Test DeFi Implementation in CBDC Forex Markets

This working paper got here out the identical week that the World Economic Forum (WEF) published an summary of decentralized autonomous organizations. The two works complement one another very much because the WEF publication was equally extensive but non-technical.

BIS often participates within the research of central bank digital currencies. It has taken a really cautious stance on cryptocurrency. It recently imposed a cap of two% on crypto assets within the reserves of internationally lively banks, effective January 1, 2025.

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