The Technology of Decentralized Finance (DeFi)

Categories : Technology and FinTech, Technology and Operational Enablers


Author: Bank of International Settlements

Decentralised finance (DeFi) builds on distributed ledger technologies (DLT) to offer services such as trading, lending and investing without using a traditional centralised intermediary. The fact that DeFi components can be programmed may open up new possibilities for more competitive financial markets and could bring efficiency gains. However, DeFi introduces enormous technological and economic complexity that makes it increasingly difficult to assess the risks and potential of DeFi financial products. But financial institutions and regulators dealing with DeFi need just such a systematic evaluation of these factors.

This BIS paper seeks to provide a comprehensive overview and classification of DeFi. It aims to explain the technical details to a broad audience and to introduce the financial protocols that the DeFi ecosystem builds upon. It explains the system’s complexity and reviews how DeFi might be used in the future. We consider recent findings that help to clarify the functioning and design of DeFi systems, and how they can interoperate.