DeFi: Wharton School of the University of Pennsylvania Publishes Comprehensive Report on Decentralized Finance

The Wharton School of the University of Pennsylvania, the business school of the University of Pennsylvania, a private Ivy League university in Philadelphia, has released a report titled, “DeFi Beyond the HypeThe Emerging World of Decentralized Finance.”

The extensive report, which has been prepared by the Wharton Blockchain and Digital Asset Project, in collaboration with the World Economic Forum (WEF), notes that decentralized finance (DeFi) is “a developing area at the intersection of blockchain, digital assets, and financial services.”

The report also mentions that DeFi protocols “seek to disintermediate finance through both familiar and new service arrangements.” The report adds that the nascent market went through dramatic growth beginning last year.

The report also notes that DeFi Pulse shows that the value of  crypto-assets locked into DeFi services increased from less than $1 billion in 2019 to more than $15 billion toward the end of last year. And then more than $80 billion in May 2021.

But the report points out that DeFi is “still early in its maturation.”

The report adds:

“Ethereum (on which most of DeFi has been built) in its current form is slow and suffers from high transaction fees, known as gas prices. Other blockchains such as Algorand, Avalanche, Binance Smart Chain, Cosmos, EOS, NEAR, Polkadot, and Solana are trying to attract DeFi-focused developers and users with promises of higher throughput and lower fees.”

But improved blockchain or distributed ledger tech (DLT) network scalability at the base layer may “come at a cost in the degree of decentralization or other attributes.”

The report also noted that the Ethereum Foundation “promises significant scalability improvements in the upcoming Eth2, while Ethereum developers have been building a variety of Layer 2 solutions, such as sharding or “rollups,” that offload computation execution, but keep some transaction data on-chain.”

The report points out that Eth2 is expected to effectively replace proof-of-work (PoW)  mining, which has been “criticized for intensive energy usage, with a proof-of-stake system.”

The report adds:

“DeFi is a new, fast-growing area. Yet it remains immature, with a variety of unresolved economic, technical, operational, and public policy issues that will be important to address. Although some protocols have attracted significant capital and the associated network effects in a short period of time, the DeFi sector remains volatile.”

The report concludes:

“DeFi has the potential to transform global finance, but activity to date has concentrated on speculation, leverage, and yield generation among the existing community of digital asset holders. In addition, the very flexibility, programmability, and composability that make DeFi services so novel also expose new risks, from hacks to unexpected feedback loops among protocols.”

The report also notes that retail investors, professional traders, institutional actors, regulators, and policy-makers will “need to temper enthusiasm for the innovative potential of DeFi with a clear understanding of its challenges.”

The report acknowledges that application developers are “actively working to address vulnerabilities and introduce new mechanisms to manage risks efficiently, but the
process is ongoing.”

As noted in the report, DeFi might succeed or fail based on whether it can “fulfill its promise of financial services that are open, trust-minimized, and non-custodial, yet still trustworthy.”

You can check out the full report here.

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