Decentralized finance is often described as finance without intermediaries. A more useful description is finance with different intermediaries: smart contracts, the people who can upgrade them, the oracles that feed them prices, and the front ends most users actually touch.
A layered system
A 2023 BIS working paper describes DeFi as a stack of technology layers, from the settlement ledger through smart-contract applications to the interfaces people use. Each layer is a place where something can fail, and failures can travel up and down the stack.
Regulators look for the responsible person
IOSCO’s final report on decentralized finance, published in December 2023, encourages regulators to analyse DeFi products and services to identify the responsible persons behind them, rather than accepting “decentralized” as a description of who is accountable. The Financial Stability Board’s 2023 framework for crypto-asset activities applies the principle of “same activity, same risk, same regulation”.
Our view
- Ask who can change the code, and how quickly. Upgrade keys concentrate power.
- Ask where prices come from. A wrong oracle price can liquidate positions that were sound.
- Ask what recourse exists. In CeFi it is the firm and its regulator; in DeFi it may be nobody.
Neither model is safe by default. Each relocates trust, and the work is to find where it went.