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The Bank for International Settlements looked under the hood of decentralized finance (DeFi) in a new working paper and introduced the DeFi stack reference (DSR) model to illustrate the technology’s functionality and risks. The report discussed the integration of the challenge with traditional finance and suggested ways in which its risks could be assessed during this integration.
The paper examined the architecture, technical primitives and functionalities of DeFi protocols in considerable technical detail. 'A profound understanding of the challenge is still lacking in many quarters,' the authors wrote, 'which calls for a specific framework for better practical knowledge of technology.'
The effort is well worth, according to the document, due to the challenge innovation:
'We still don't know whether and to what extent the challenge is going to proliferate in the future. [...] But we see it as a challenge because it leverages innovative technology that could shape the future financial ecosystem."
Algorithmic automation, "competitive finance engineering" and transparency "are of interest far beyond cryptocurrency markets," the document says. By competitive engineering, the authors wanted to say composability, a combination of intelligent contracts to form complex and unique financial products.
The dsr model divides the challenge into three layers: interface, application and regulation, with sub-layers enabling the observed variation between the challenge technologies. The newspaper used various tokens, blockchain and financial services as examples. The run on terra () has been discussed in detail for its informational value and as an example of the efficiency of the search technique of the authors.
Related: Bank for International Settlements will test DeFi implementation in forex CBDC markets
This working paper appeared the same week as the World Economic Forum (WEF) released an overview of decentralized autonomous organizations. Both books are very complementary, since the wef publication was also complete but not technical.
#DeFi is a programmable financial ecosystem that lets users trade, lend and invest without relying on a central intermediary. This paper deep dives into the underlying technology, its economic potential and the related risks https://t.co/NLkvja6Not #Ethereum #blockchain pic.twitter.com/EnccGmmf93
— Bank for International Settlements (@BIS_org) January 19, 2023
The BIS participates on a regular basis in the study of central bank digital currencies. He took a very conservative position on cryptocurrency. It recently imposed a 2% ceiling on crypto assets in reserves of internationally active banks, effective Jan. 1, 2025.
