BIS: DeFi decentralization is an illusion! Governance tokens and consensus mechanisms encourage centralization of power

BIS (Bank for International Settlements) released a quarterly report last week. The report mentioned that Defi has encountered problems since its development and claimed that its decentralized nature is nothing more than an illusion. Although the issue of stable currency reserves is often raised, it still lacks the constraints of the regulatory framework.

Decentralized illusion

Although the DeFi protocol can provide financial services without intermediaries, and assist users in various operations through smart contracts. However, BIS believes that a certain degree of centralization is inevitable, and the current decentralization vision of most DeFi supporters is just an illusion.

"First of all, when making strategic and operational decisions, centralized governance is required. In addition, certain functions of DeFi, especially the consensus mechanism, contribute to the concentration of power." BIS said.

Most DeFi have their governance tokens. Governance token holders can influence the development of DeFi projects by voting on changes to proposals or governance systems. Owning more governance tokens also means greater and more centralized decision-making power. If we go back to discuss the issuance mechanism of these governance tokens, the development team and early investors usually hold a large proportion of the token shares, which exacerbates the centralization problem.

The fragility and instability of DeFi

High leverage has been a major feature of the DeFi platform since its development. Even though the lending platform often requires over-collateralization to lend loans, the re-collateralization of loans after lending can cause users to use a small amount of funds to generate great risks. Position.

The figure below shows the clearing amount of major DeFi lending platforms due to ETH price fluctuations. It can be found that when the price changes drastically, the amount of serial liquidation caused by excessive leverage is very large. It is precisely because of this characteristic that BIS believes that the current DeFi market is still far less stable than the traditional financial industry.

Stablecoins are not in NQA status

The risk of stablecoins has been mentioned in various reports and conferences. The transparency and liquidity of its reserve assets are the main sources of risk. BIS uses NQA (no-questions asked) in the report to describe the current problems of stablecoins. NQA here means that users can receive the currency in transactions without properly investigating its value.

But this is not the case with stablecoins. Most investors are willing to use stablecoins because of their trust and the convenience of exchange. If the value of the reserve assets behind stablecoins changes someday, it will inevitably cause panic among holders. In other words, in the absence of NQA, if stablecoin holders suspect that the value of assets supporting the currency has dropped significantly, it will often trigger a wave of escape. The opacity and lack of supervision of reserve assets are the main reasons for the erosion of this trust.

Traditional finance and the encryption industry are connected

Although the above problems have yet to be resolved by further legislation by regulatory agencies, traditional finance has become more open to the encryption industry. As can be seen from the figure on the left below, traditional banking institutions are already willing to invest in crypto-related companies. The figure on the right also shows that the total amount of funds managed by crypto funds has skyrocketed in recent years.

The United States has also recently opened up Bitcoin futures as the underlying ETF. From the above signs, we can see that this fast-growing industry urgently needs regulatory constraints and is quickly entering people's lives.