DeFi the disruptor? Dissecting blockchain’s impact on the financial system

Decentralized finance – or DeFi for short – is causing a frenzy of innovation like that of the early days of the web. At a time when people are living more of their lives online than ever before, the technology not only has the potential to form part of the next generation of global financial rails, but also to rewire the architecture of the digital economy.

Speaking to my co-panelists at The Economist's Technology for Change Week, we all agreed that DeFi offers unprecedented openness, interoperability and access to capital which can result in more efficient, less costly financial services and more options for consumers. But as with all new, untested technologies, it also presents a wide range of risks, notably the potential for volatility and misuse, and lack of consumer protections. Regardless of the technology they are using, people want to know that their money is safe and that there are safeguards to protect them if the system fails.

Ultimately, it becomes a question of trust in the system, which led the panel to the thorny issue of regulation. While it may seem paradoxical to apply regulation to a system which has decentralization at its very core, it was agreed that some form of regulation will be needed to help establish confidence and trust.?

My own take is that while regulation may initially slow down the development of DeFi, ultimately it will bring greater legitimacy to the system. Importantly, what this doesn’t mean is that we simply transfer regulatory mechanisms over from traditional finance. As Teana Baker-Taylor pointed out, we should be aiming for similar governance - but smarter and better.

What’s your take on DeFi and its potential to transform finance? Let me know in the comments below.

A big thank you to The Economist's Mike Bird for moderating and to my co-panelists Sheila Warren at Crypto Council for Innovation, Teana Baker-Taylor at Chamber of Digital Commerce and Julian Hosp from Cake DeFi for the thought-provoking discussion.?

View an excerpt from our discussion here.