In a recent working paper, the Bank for International Settlements (BIS) examined the inner workings of decentralised finance (DeFi) and created the DeFi stack reference (DSR) model to highlight the capabilities of the technology as well as the potential hazards associated with it.
The research offered some suggestions as to how the risks associated with the integration of DeFi with conventional finance might be evaluated. It also explored this integration.
In the study, a substantial amount of technical depth was devoted to analysing the architecture, technical primitives, and functions of DeFi protocols. According to what the authors noted, “a comprehensive grasp of DeFi is still missing in many circles,” and because of this, “a specialised framework for an enhanced working knowledge of the technology” is required.
Despite this, we believe that DeFi is an important development since it makes use of cutting-edge technology that has the potential to influence the future of the financial sector.
” The areas of algorithmic automation, “competitive financial engineering,” and transparency “are of interest far beyond cryptocurrency markets,” “according to the report.
The writers meant composability when they referred to competitive engineering. Composability is the process of integrating smart contracts to construct complicated and one-of-a-kind financial solutions.
The DSR model separates DeFi into three levels: the interface, the application, and the settlement. Within each of these layers, there are sublayers that allow for the variety of DeFi technologies.
In order to illustrate its points, the study employed many distinct types of tokens, blockchains, and financial services.
The authors went into great detail on the run on Terra (LUNA) because of its informative worth and because it served as an example of how successful their inquiry approach was.
This working paper was published during the same week as an overview of decentralised autonomous organisations was made available by the World Economic Forum (WEF).
Because the WEF publication was similarly thorough but lacked a technical focus, the two publications are extremely complimentary to one another.
Research on digital currencies is routinely conducted by central banks, in which the BIS participates.
It has adopted a very conservative posture towards cryptocurrencies.
Recently, it put a 2% cap on the total value of crypto assets that may be held in reserves by globally operating banks. This cap will take effect on January 1, 2025.