Decentralised Finance (DeFi): A Critical Review of Related Risks and Regulation

Abstract

Decentralised finance (DeFi) promises to improve personal financial autonomy and disrupt many aspects of financial markets, in particular how individuals transact with each other, store their money, invest, lend, and borrow. For this reason, the growing adoption of the open protocols that make up the DeFi space comes with both risks and opportunities to existing financial ecosystems. Given its novelty, the scholarly analysis of DeFi’s impact on the financial world is still limited. To fill this gap, this article provides a systematic, critical review of the literature about the risks of DeFi and offers a framework for further discussion on the policy and regulatory instruments. The goal is to contribute to the debate on the governance of DeFi, highlight and clarify foundational elements of DeFi, and encourage further discussions on the topic.

Keywords: Decentralisation, DeFi (decentralised finance), Ethereum, Smart Contracts, Stablecoins, DAOs (decentralised autonomous organisations)