Furthermore, because technology is imperfect, users of blockchain products are expected to understand the benefits and risks of blockchain technology and use their judgment to minimize their individual exposure to potential downside risks. This can raise skepticism about the net value (that is, the risk-adjusted benefit) of decentralized finance. An example of products formed out of blockchain technology include Bitcoin, Ethereum, Litecoin, Cardano, Polkadot, Bitcoin Cash, Stellar and Chainlink.ĭecentralized finance is enabled by blockchain technology, and there has been a general tendency by practitioners and researchers to over-emphasize the benefits of decentralized finance without paying adequate attention to the associated risks and challenges. Decentralized finance operates on blockchain technology, and the advantages of blockchain technology to users is that it eliminates delays and failure of intermediaries, it reduces the cost of transactions, and reduces credit risk when used in lending. It is often described as a digital ledger of duplicate transactions that are spread across many computer networks. A blockchain is a database that records information that cannot be changed once recorded. Decentralized finance goes a step further by offering digital financial services on a public database known as blockchain over the internet. Digital finance is a segment of finance that offer financial services to users over the internet through digital devices and platforms. The recent boom in decentralized finance arose from disruptive transformations in digital finance. This review also aims to identify fruitful areas for future academic research on decentralized finance. The paper summarizes the existing research and developments in decentralized finance to help academics and policymakers assess the viability, strength, weaknesses and implementation challenges of decentralized finance so that they can make informed judgement on whether or not decentralized finance is a worthy innovation to endorse while growing the literature. The purpose of this paper is to review the existing research and developments on decentralized finance. Areas for further research are provided to advance the literature on decentralized finance. Several policy issues associated with DeFi are discussed. There are also concerns that banning crypto assets can hinder the growth of decentralized finance in African countries where regulators do not fully permit blockchain-enabled cryptocurrencies. There are concerns that regulating decentralized finance can impede growth in decentralized finance markets in Asia. Observations on DeFi developments from around the world show that there is growing interest in decentralized finance in Europe, US, Asia and Oceania. They emphasize the benefits of DeFi in great depth but the challenges of DeFi were not analysed in great depth, and there are no critical studies on DeFi. Most studies hold a positive view about DeFi. The review of existing DeFi research show that there are few studies on DeFi, and a large number of DeFi research studies are non-empirical studies. The associated risks include execution risk in smart contracts, legal liability risk, data theft risk, interconnectedness risk, external data risk, and greater propensity for illicit activity using DeFi applications. The findings of the literature review are that decentralized finance offers many benefits such as broadening financial inclusion encouraging permission-less innovation eliminating the need for intermediaries ensuring the immutability of transactions censorship resistance and making cross-border transactions cheaper. This paper reviews the decentralized finance (DeFi) research and development around the world. Decentralized finance is financial services offered on a public blockchain over the internet.
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