![]() Note that TVL might be overestimated due to token re-usage. gaming and NFT mining) (iii) Credit, protocols that allow users to borrow and lend assets and that pay a reward for the liquidity provision or aggregate yield from various protocols, as well as protocols that use reserves of assets to issue and back their native tokens (iv) Insurance, protocols that offer coverage against losses caused by events typically in the DeFi ecosystem, such as hacking, malfunctioning of exchanges or smart contracts (v) Payments, protocols that allow users to pay/send/receive crypto-assets (vi) Staking, protocols that reward for staked assets with crypto-assets and (vii) Trading, protocols that allow users to swap and trade crypto-assets. The categories include (i) Assets, including derivatives, synthetics, options, indices, algorithmic stablecoins, and protocols that mint their own stablecoins or launch new projects and coins (ii) Auxiliary, protocols that allow users to bet on future results, that bridge tokens from one network to another or allow for the interoperability among different blockchains, and that support DeFi services (incl. TVL represents the sum of all assets deposited in DeFi protocols earning rewards, interest, new coins and tokens, fixed income, etc. Sources: Defi Llama, CryptoCompare, CoinMarketCap, CoinGecko and ECB calculations. Ĭrypto-assets deposited in DeFi protocols (TVL) and the market capitalisation of top DeFi tokens skyrocketed in 2021 but are still dwarfed by total crypto-assets Similarly, the value of many DeFi tokens plummeted, especially the DeFi token Luna, which is directly connected to TerraUSD. After the crash of the stablecoin TerraUSD in early May, TVL in DeFi fell by almost 40% or €80 billion, with credit and staking protocols suffering the biggest decreases. ![]() However, in comparison to the size of the overall crypto-asset market, DeFi can still be considered a niche segment (Chart A, panel b). DeFi tokens, a set of crypto-assets that are used in DeFi protocols, experienced an almost tenfold increase in 2021. The size of DeFi is generally measured by the sum of all digital assets deposited in DeFi protocols (“total value locked”, TVL), which increased from approximately €18 billion in January 2021 to over €240 billion by the end of December 2021 (Chart A, panel a). While the idea of a decentralised system started with the launch of the Ethereum blockchain, DeFi’s main growth began in 2021 (Chart A). The size of DeFi has grown exponentially over the last year, although it still remains low compared with total crypto-asset market capitalisation. Against this backdrop, this focus piece provides an analysis of DeFi, focusing on the similarities and differences between DeFi and traditional finance, what this implies in terms of risks and the potential avenues to mitigate risks and respond to regulatory challenges. This novel method of service provision has its own risks and also presents challenges for the traditional regulation of financial services, particularly due to the lack of intermediaries as regulatory “entry points”. The main difference is the way DeFi provides services, not relying on centralised intermediaries. Most DeFi applications do not provide new financial products or services, but mimic within the crypto-asset ecosystem those provided by the traditional financial system. In simple terms, DeFi participants are part of a peer-to-peer network (built on a public blockchain) where assets represented in the network can be transferred automatically (via so-called smart contracts). Prepared by Alexandra Born, Isabella Gschossmann, Alexander Hodbod, Claudia Lambert and Antonella Pellicani ĭecentralised finance (DeFi) represents a novel way of providing financial services that cuts out traditional centralised intermediaries and relies on automated protocols instead.
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