DeFi May Result in a Paradigm Shift – Federal Reserve Paper

According to the Federal Reserve Bank, decentralized finance may eventually cause a huge paradigm shift in the finance world. This point was documented in a paper published by the Federal Reserve Bank of St Louis early this month.

DeFi Analysis by Dr. Fabian Schar

Dr. Fabian Schar was one of the researchers who went in-depth to explore the DeFi space recently. He shared the details of his extensive research in a published document recently. According to Dr. Schar, the DeFi ecosystem can be the future of finance if the loopholes in the model can be fixed.

The DeFi model replicates the real-world financial services structure. The concept that makes DeFi unique, however, is the decentralized nature of its financial services. As such, digital assets, loans and collaterals can be given and taken in a more transparent and open manner.

Over the past year, the growth of the DeFi space has been explosive. It has recorded a TVL increase that is 7x as much as it was a year ago in the entire ecosystem. Across the various blockchains, the DeFi space currently has a TVL value of over $134 billion.

Ethereum’s Role in the DeFi Space

In Dr. Schar’s DeFi analysis, he stated that smart contracts are the foundation of the DeFi space. Most of the smart contracts in the DeFi space run on the Ethereum blockchain. This has also contributed to the growth of Ethereum over the years.

Ethereum serves as the collateral for most DeFi protocols. Thus, about 9% of the total supply of Ethereum is locked up. According to Schar, Ethereum has unleashed a wave of innovation built on blockchain technology.

The growth of Ethereum and other DeFi tokens is proof that the ecosystem is scalable. One of the major causes for caution in the DeFi space however is the rate at which attackers exploit its security. Also, the high gas fees that DeFi transactions attract. If these loopholes can be covered successfully, DeFi could be the future of the finance ecosystem.

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