Today, almost every aspect of banking, lending and trading is managed by centralized systems, operated by governing bodies and gatekeepers. Regular consumers need to deal with a raft of financial middlemen to get access to everything from auto loans and mortgages to trading stocks and bonds.
DeFi finds a new way to challenge this centralized financial system by disempowering middlemen and gatekeepers and empowering everyday people via peer-to-peer exchanges. DeFI is making its way into a wide variety of simple and complex financial transactions.
Recently scholars such as Brian Judge, Barry Eichengreen and John Zysman of Berkeley University of California in the working paper titled “The Mirage of Decentralized Finance” aims to understand how to regulate the cluster of practices known as decentralized finance, or DeFi. It further underlines the political and economic questions related to it.
The paper highlights that DeFi aims to implement an alternate set of institutions that are to the benefit of those who create or control these institutions. It is covered that, in the name of protecting against risk and reducing transaction costs, generates greater risk and higher costs.
The paper presents three claims, Decentralized Finance” is an oxymoron, DeFi is an appendage rather than an alternative to the traditional financial system, an appendage whose circumvention capacity is its core selling point and blockchain does not improve upon existing financial infrastructure. It is a solution in search of a problem.
Further, the paper mentions, crypto lacks the essential attributes of money, it is not a store of value, it is not used as a medium of exchange, and it is an unreliable unit of account. Thus, it offers limited portfolio diversification benefits because its returns are highly correlated with those of other risk
assets. it is a speculative asset and facilitator of otherwise illicit transactions.
Also, it underscores common mantra that DeFi is the “future of finance” aims to naturalize this political project as a technological fait accompli. The dream is to fulfil the Hayekian vision of fully privatized money free from state oversight or control.
Finally, the paper underlines, there is a fundamental asymmetry between the problems of the “traditional” financial system identified by proponents of DeFi and the proposed solution, the purported benefits of DeFi in terms of financial inclusion and reduced transaction costs pale in comparison with the risks, which are unknown and potentially high.
