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Research Details
Centralized and decentralized finance: Coexistence or convergence?, SSRN
Abstract
The financial crisis of 2007-08 revealed that centralized finance (CeFi) relying on large, interconnected financial institutions is easily destabilized. Since the crisis, significant regulatory tightening, monetary easing, and new competitors (e.g., fintechs) have created significant pressure on profit margins and CeFi business models. Recently, a new form of financial intermediation that functions independently of centralized intermediaries has emerged, namely decentralized finance (DeFi). DeFi relies on public, permissionless blockchains and uses so-called smart contracts to perform financial services such as borrowing, lending, and trading in a transparent and automated fashion. The paper gives an overview of DeFi and discusses its advantages and disadvantages compared to CeFi. We analyze different scenarios about the future paths of CeFi and DeFi, concluding that a convergence scenario is most likely.
Type
Article
Author(s)
Axel Wieandt, Laurenz Heppding
Date Published
2022
Citations
Wieandt, Axel, and Laurenz Heppding. 2022. Centralized and decentralized finance: Coexistence or convergence?. SSRN.