The current Total Volume Locked (TVL) in decentralized finance (DeFi) has reached a Total Volume Locked (TVL) above $247 billion, and it is still not proof enough for the Bank of Internal Settlement (BIS). On Monday, the Bank said that the DeFi growth is just an ‘illusion.’
BIS says that DeFi will cause financial instability
The report from BIS claims that DeFi vulnerabilities revolving around “high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock-absorbing capacity” will lead to financial instability in case of widespread adoption.
“If DeFi were to become widespread, its vulnerabilities might undermine financial stability. These can be severe because of high leverage, liquidity mismatches, built-in interconnectedness, and the lack of shock absorbers such as banks,” said the report from BIS.
DeFi protocols have elements of centralized corporations
The BIS report brought to attention that DeFi is not totally decentralized in nature because of the presence of consensus mechanisms, which have their own concentration of power.
Furthermore, the report also states that some platforms present majority power a selected percentage of the token owners, leading to centralization.
“On balance, DeFi’s main premise — reducing the rents that accrue to centralized intermediaries — seems yet to be realized,” said the BIS creport.
Stablecoins “lack public backstop”
The BIS report also explained that stablecoin issuers lack “public backstops, such as deposit insurance, and rely on private backstops (collateral) to ensure that stablecoins maintain a steady value and are suitable as mediums of exchange.”
The report explained that although the mechanism followed by stablecoins is similar to what banks follow, there is a major difference in what drives their growth. BIS stated that the growth of stablecoins is liability-driven as compared to banks, whose growth is asset-driven.
“Lending in DeFi tends to be overcollateralized. The reason is similar to that underpinning the over-collateralization of DeFi stablecoins – the inherent lack of trust in anonymous transactions, together with the high volatility of the crypto assets used as collateral,” added the report.