Iota Nassr is a policy analyst at the OECD within the financial markets division. She currently manages the FinTech experts group of the OECD Committee on Financial Markets, leading the analysis around anything that has to do with digitalization of finance. The OECD Report “Why decentralised finance matters and the policy implications” is product of the committee’s expert group composed of representatives of the 38 OECD members coming from Central Banks, Ministry of Finance and other financial authorities.

 

What is blockchain?

Iota’s definition of blockchain hasn’t changed much since her previous podcast on Insureblocks on “Tokenisation of Assets and Potential Implications for Financial Markets – OECD Report” on the 13th of June 2021. She still sees blockchain and DLT, more broadly, as a way to record, share information and to exchange value in a decentralised manner without the need for trusted central authorities or intermediaries.

However now she believes the emphasis is now more on the programmable nature of decentralised distributed ledger technologies and the level of disintermediation involved in the different networks and structures that we observe in the market.

 

Why this report?

The Summer of 2020, also known as the DeFi summer caught the attention of the OECD. This was due to the exponential growth they were observing and the level of participation of retail investors in what is a very highly volatile market that is devoid of the traditional safeguards that are in place for investors and consumers in traditional financial markets.

The feedback loops they have observed between DeFi and mainstream crypto such as Bitcoin, Ether ,the main stable coins along with the recycling of profits between the two kinds of environments, made it increasingly critical for the OECD to have a look at this space.

The final reason for analysing this market was the growing institutionalisation of crypto assets, which may be increasing risks of interconnectedness between decentralised and traditional finance. This report’s objectives is to like into DeFi models to understand the risks, opportunities and implications for traditional finance.

 

What is Defi?

DeFi, decentralised finance, claims to replicate what is known as traditional finance in a decentralised way in an open way through applications built on Ethereum and increasingly on other blockchains.

There are two possible misconceptions around DeFi. The first is that not all DLT based financial applications are DeFi. So the fact that a financial application is built on the blockchain does not make it by default part of DeFi. The second misconception has to do with self proclaimed DeFi applications that may not be truly decentralised. The degree of decentralisation varies from one project to another.

The report defines three key defining features:

* Non-custodial: The protocols and the applications have a non-custodial nature. There is no central authority or other intermediary gains access to or control over participants’ digital assets; instead, participants manage their private keys, and therefore their digital assets, directly.

* Self-governed and community-driven: Most DeFi protocols are open-source and allow the community to review and further develop the code underlying the protocols. This happens through the use of governance tokens.

* Composable: Existing components of DeFi networks (i.e. digital assets, smart contracts, protocols and applications built on top of the...