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Crypto markets have found an outlet in centralized finance, or "DeFi"
Is DeFi the acceptable face of crypto?
Or can central bank digital currencies (CBDCs) do DeFi but without selling coins for speculation?
A thread on a panel I chaired this morning
Is DeFi the acceptable face of crypto?
Or can central bank digital currencies (CBDCs) do DeFi but without selling coins for speculation?
A thread on a panel I chaired this morning
One notable development has been the fragmentation of the blockchain universe, with #Ethereum giving up its dominance to newer chains
The chart below shows the percentage of collateral value locked in various chains; #Ethereum had close to 100%; now barely 50%
The chart below shows the percentage of collateral value locked in various chains; #Ethereum had close to 100%; now barely 50%
Such fragmentation suggests that network effects are not operating (or operating strongly); typically, businesses with network effects give rise to "winner takes tall"
Crypto markets are not an example of such markets
Crypto markets are not an example of such markets
The reasons for the fragmentation are well-known - the lack of scalability
Higher gas fees are symptomatic of lack of scalability, leaving the door open to newer chains with more centralised business models that take advantage of the gaps
Higher gas fees are symptomatic of lack of scalability, leaving the door open to newer chains with more centralised business models that take advantage of the gaps
The spikes in gas fees put the rise of newer chains into context
The trilemma highlighted by @VitalikButerin between decentralisation, scalability and security is the right lens to view these developments
The trilemma highlighted by @VitalikButerin between decentralisation, scalability and security is the right lens to view these developments
The contrast to instant payment systems is very stark
Network effects are very strong in instant payment systems
Brazil's Pix signed up two-thirds of the adult population in little over one year
https://www.bis.org/publ/bisbull52.htm
Network effects are very strong in instant payment systems
Brazil's Pix signed up two-thirds of the adult population in little over one year
https://www.bis.org/publ/bisbull52.htm
Pix is free for individuals and virtually free for merchants, further turbocharging the network effects
Pix transactions are poised to overtake credit and debt card transactions
Pix transactions are poised to overtake credit and debt card transactions
That said, one type of network effects plays an important role in DeFi (and crypto more generally)
DeFi is sustained by selling coins; the positive correlation between coin prices across chains can create network effects that create spillover effects
DeFi is sustained by selling coins; the positive correlation between coin prices across chains can create network effects that create spillover effects
The fact that institutional investors are now big players in the crypto market underscores the importance of coin speculation in sustaining DeFi
DeFi activity is closely correlated with the price dynamics of the underlying coins
The test for the durability of DeFi will come once the crypto markets mature and new inflows slow to a trickle
The test for the durability of DeFi will come once the crypto markets mature and new inflows slow to a trickle
The panel also discussed how well DeFi can handle real world assets - we discussed tokenising bottles of wine, for example
The legal framework turns out to be key; so some degree of centralisation is inevitable
The legal framework turns out to be key; so some degree of centralisation is inevitable
We also discussed how CBDCs could be the basis for DeFi, but without selling coins
Smart contracts can be run on multi-CBDC platforms, such as the one trialed in Project Dunbar https://www.bis.org/publ/othp47.htm
Smart contracts can be run on multi-CBDC platforms, such as the one trialed in Project Dunbar https://www.bis.org/publ/othp47.htm
But DeFi using CBDCs will look very different
CBDCs use real names, unlike crypto
Ensuring privacy will mean that CBDC decentralisation cannot post all transactions to a public blockchain; no-one else needs to know which supermarket I buy my groceries from
CBDCs use real names, unlike crypto
Ensuring privacy will mean that CBDC decentralisation cannot post all transactions to a public blockchain; no-one else needs to know which supermarket I buy my groceries from
Project Dunbar is one of three multi-CBDC platforms currently being developed by the BIS Innovation Hub
Decentralisation is a necessity, because there is more than one currency (and hence more than one central bank involved)
The report goes into details https://www.bis.org/publ/othp47.htm
Decentralisation is a necessity, because there is more than one currency (and hence more than one central bank involved)
The report goes into details https://www.bis.org/publ/othp47.htm
I am grateful to my panelists this morning for a really great discussion
Jan Brzezek, Iota Nassr, Thomas Eichenberger and Evan Van Ness
Jan Brzezek, Iota Nassr, Thomas Eichenberger and Evan Van Ness
Is DeFi the acceptable face of crypto?
Video of the session is now up
Video of the session is now up
