We’ve made it. Kind of.
A paper regarding decentralized finance—which surprisingly included the term “DeFi”— was recently published to the website of the St. Louis Federal Reserve, a branch of the United States’ central bank.
Fabian Schär, a professor at the University of Basel who focuses on blockchain and DeFi technologies, wrote the paper. He is a member of the Center for Innovative Finance, which is a part of the University focused on financial technology.
What does the paper say?
In the paper, Schär outlined that decentralized finance could lead to a “paradigm shift in the financial industry.”
The paper concluded that while DeFi is still niche and small compared to traditional financial services, there are benefits in terms of “efficiency” and other attributes of a financial system:
“I conclude that DeFi still is a niche market with certain risks but that it also has interesting properties in terms of efficiency, transparency, accessibility, and composability. As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure.”
Schär’s paper outlined how Ethereum smart contracts are composable—that’s to say, they can work together to unlock key innovations and benefits. Further, it outlined key components of how Uniswap, MakerDAO, Aave, and other decentralized protocols work and why they can be seen as better than centralized services.
Many in the space reacted to the paper with a bullish sentiment. Fred Ehrsam, co-founder of Paradigm, said that “you can’t make this stuff up” in response to the paper.
A branch of the Federal Reserve calls DeFi a potential paradigm shift
You can't make this stuff up https://t.co/iUXYILZhyS
— Fred Ehrsam (@FEhrsam) February 8, 2021
It’s worth noting that while this was shared by the Federal Reserve branch, this isn’t a firm endorsement of the sentiment. The branch just hosted this discussion.
The paper comes as the viability of decentralized finance has apparently become stronger than ever before.
Michael Novogratz, the founder of Galaxy Digital, says that the GameStop short squeeze by retail investors against Wall Street is a sign that DeFi has value:
“1) This GME squeeze is deeper than a squeeze. its a large group of people saying they don’t want Citadel preying on their orders from RH, they don’t want IPO’s being allocated to insiders, they don’t like a system geared to the already rich.This is a giant endorsement of DEFI.”
Mark Cuban, the billionaire owner of the Dallas Mavericks, has also begun to dabble in the space in response to the Gamestop event and other trends.
Disclaimer: This author is an analyst at ParaFi Capital. ParaFi Capital may hold positions in assets mentioned in this article. The views displayed in this article are opinions of the author—and the author only.