The ING bank recently investigated the emerging sector of decentralized finance (DeFi).
In the report, ING concluded that DeFi offers many advantages over traditional financial services and even enables new services. However, there are also some drawbacks. According to the researchers, “the best of both worlds would be achieved when centralized and decentralized financial services work together.”
ING mentions the following advantages of DeFi, among others: composability (the possibility to combine different products to create new financial services), flexibility (transactions can be executed much faster worldwide), accessibility (everyone can participate), transparency (everyone can view the underlying code), automatic (processes can be executed automatically, making them more cost-efficient) and interoperability (different products and services can work together.)
In contrast, ING reports that DeFi is not without risk. Among other things, the report notes that some of the benefits are not always realized in practice, that there is no liability when something goes wrong and that it is often technically difficult for users. There are also no anti-money laundering (AML) and know your customer (KYC) processes.
The report suggests that financial institutions such as banks handle these due diligence processes before allowing clients to use DeFi. However, that sounds like it goes against the whole idea of decentralization and accessibility to this market.
“In this way, a DeFi service can comply with AML regulations. However, because this is unknown territory, more research is needed to establish the validity of such collaboration between centralized banks and decentralized financial services. ”
Herve Francois, head of the blockchain division at ING, tells Coindesk that “DeFi can be more disruptive to the financial sector than bitcoin.” He adds that ING has the emerging sector in its sights.