The Bank of Canada has released a job description on decentralized finance (DeFi), assessing the innovations that have made it popular as well as the challenges and risks associated with its use. The staff note describes DeFi as a multi-layered structure, with the Ethereum blockchain as the bottom layer (or settlement layer).
Developers build various tools and services on top of the main blockchain, including tokenization, lending services, and more. The Bank of Canada report highlights three key areas where DeFi can transform the financial system: frictionless financial services, openness, and transparency.
In addition to key DeFi innovations that can transform the traditional financial system, the report also talks about the challenges and risks associated with the DeFi ecosystem, claiming that despite innovations and possibilities, the overall economic benefits of DeFi are still limited.
In addition, the report also lists three key challenges facing the DeFi ecosystem today: lack of real-world tokenization, high concentration of internal interconnections, and reliance on unregulated centralized financial ecosystems.
The staff report noted that while the DeFi ecosystem has brought a wealth of innovation to the financial sector, regulatory challenges and vulnerabilities limit its potential application in traditional finance.