‘DeFi may lead to a paradigm shift’ says Federal Reserve Bank paper

A paper published by the Federal Reserve Bank of St Louis has delved into the expansion of decentralized finance and Ethereum’s role in it.

The research, penned by Dr. Fabian Schär and published on May 2, has taken a deep dive into the world of DeFi, hinting that if security concerns and risks can be addressed, it may lead to huge changes in the financial industry.

“DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way,” Dr. Fabian Schär wrote, also hailing its efficiency, accessibility, and composability.

“DeFi may lead to a paradigm shift in the financial industry and potentially contribute toward a more robust, open, and transparent financial infrastructure.”

DeFi growth over the past year has been monumental, with a 700% increase in the total value locked across the ecosystem. At the time of writing, that figure stands at an all-time high of around $134 billion across different blockchain according to DefiLlama.

Dr. Schär explained that the backbone of the entire DeFi ecosystem is smart contracts, the majority of which run on Ethereum. The report lists a number of popular DeFi related tokens but points out that the vast majority of tokens are issued on the Ethereum network.

ETH is also used as collateral for a vast number of DeFi protocols and 10.5 million ETH, or 9% of the entire supply, is locked up according to Defipulse.

Schär, a professor of Distributed Ledger Technology at the University of Basel in Switzerland, stated that Ethereum has unleashed a wave of innovation built on blockchain technology.

He added that the growth of digital assets such as ETH, and the potential for DeFi, means the sector is destined for bigger things:

“The spectacular growth of these assets alongside some truly innovative protocols suggests that DeFi may become relevant in a much broader context and has sparked interest among policymakers, researchers, and financial institutions.”

According to the ConsenSys Q1 DeFi report, the number of Ethereum addresses interacting with DeFi protocols is at an all-time high of 1.75 million, following a growth of 10X since the beginning of 2020.

The research adds to the bullish momentum for Ethereum which has seen it outperform Bitcoin this year and propel the asset to an all-time high of just over $3,500 on May 4.