Do we still need financial intermediation? The case of decentralized finance – DeFi

What is it about?

Decentralized Finance (DeFi), enabled by blockchain, could bring about a new financial system, where peers will interact directly, with little or no place for traditional intermediation. However, we find Decentralized Finance does not eliminate financial intermediation, but enables it to be performed in new ways, while potentially enhancing both humans' and algorithms' role.

Featured Image

Photo by Launchpresso on Unsplash

Photo by Launchpresso on Unsplash

Why is it important?

Decentralized finance (DeFi), enabled by blockchain, could bring about a new financial system, where peers will interact directly, with little or no place for traditional intermediation. However, some crucial tasks cannot be left solely to an algorithm and, consequently, most DeFi applications still require human decisions. Our paper shows that DeFi does not eliminate financial intermediation, but enables it to be performed in new ways, where decentralization means that no single entity can hold too much power or monopoly. DeFi has, however, inherited risks from the underlying technologies that unintentionally facilitate illegal behaviour and can hamper the authorities’ supervision. The complex duality algorithm- vs human-based actions will not be solved indisputably in favour of the former, as DeFi solutions can range from requiring algorithms to play a dominant role, to enabling greater human interaction by actively involving more people.