Advances associated with decentralized finance (defi) have the potential to profoundly affect financial market trading, which could lead to efficiency gains but also shake up how intermediaries operate. The next wave of innovations in financial market trading could be driven by technological advances that alleviate some potential drawbacks of the centralized approach.
One of the uses emerging from defi that look more like complements to centralized finance is DLT for recordkeeping in a 24/7 trading world: “We already see several financial institutions experimenting with DLT for traditional repo trading that occurs 24/7,” Waller said. Stablecoins as a settlement instrument, given guardrails, were also highlighted as an important innovation.
Smart contracts, he noted, can effectively combine multiple legs of a transaction into a single unified act executed by a smart contract. This can provide value as it can mitigate risks associated with settlement and counterparty risks by ensuring the buyer will not pay if the seller does not deliver.
While these efforts are still in early stages, the functionality could expand to a broad set of financial activities. The bottom line is that things like DLT, tokenization, and smart contracts are just technologies for trading that can be used in defi or also to improve efficiency in centralized finance.
“These technologies will almost certainly lead to efficiency gains over time, but as they develop, we should think carefully about their role in the broader financial landscape,” Waller said in the speech.