BIS paper finds DeFi will need to centralize to make inroads into the real economy

DeFi lending: intermediation without information?
BIS Bulletin No 57
14 June 2022
by Sirio Aramonte, Sebastian Doerr, Wenqian Huang and Andreas Schrimpf

Lending platforms are a key part of the decentralised finance (DeFi) ecosystem, but their institutional features mostly facilitate speculation in cryptoassets rather than real economy lending. Due to the anonymity of borrowers, overcollateralisation is pervasive in DeFi lending, which generates procyclicality. Reliance on collateral also limits access to credit to borrowers who are already asset-rich, negating financial inclusion benefits. For DeFi lending to make inroads into the real economy, it needs to tokenise real assets and rely less on collateral by developing its ability to gather information about borrowers; as such, the system is likely to gravitate towards greater centralisation.

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