DeFi Beyond the Hype The Emerging World of Decentralized Finance

Overview: DeFi is a new, fast-growing area. Yet it remains immature, with a variety of unresolved economic, technical, operational, and public policy issues that will be important to address. Although some protocols have attracted significant capital and the associated network effects in a short period of time, the DeFi sector remains volatile. DeFi has the potential to transform global finance, but activity to date has concentrated on speculation, leverage, and yield generation among the existing community of digital asset holders. In addition, the very flexibility, programmability, and composability that make DeFi services so novel also expose new risks, from hacks to unexpected feedback loops among protocols.

Retail investors, professional traders, institutional actors, regulators, and policy-makers will need to temper enthusiasm for the innovative potential of DeFi with a clear understanding of its challenges. Developers are actively working to address vulnerabilities and introduce new mechanisms to manage risks efficiently, but the process is ongoing. DeFi will ultimately succeed or fail based on whether it can fulfill its promise of financial services that are open, trust-minimized, and non-custodial, yet still trustworthy.