Decentralizing Finance: How DeFi, Digital Assets, and Distributed Ledger Technology Are Transforming Finance by Kenneth Bok explores how decentralized finance (DeFi), digital assets, and distributed ledger technology (DLT) are transforming the financial industry. This book provides comprehensive and in-depth insights for finance professionals and those interested in the field.
- Overview of DeFi: DeFi is an alternative financial infrastructure built on public blockchains, characterized by openness, permissionless access, and interoperability, enabling various financial activities. Its definition can be narrow or broad, with core features including non-custodial or self-custodial, censorship-resistant, community-driven, and decentralization. Compared to traditional finance (TradFi), DeFi differs in interoperability, transparency, openness, decentralization, and regulation.
- Infrastructure and Tools of DeFi: DeFi’s infrastructure includes blockchain, smart contracts, and other technologies. Blockchain was created by Satoshi Nakamoto in 2008, and Ethereum introduced smart contracts, forming the basis for many DeFi applications. It also covers different types of blockchains, such as permissioned and permissionless, and L1 and L2 layers. DeFi tools include various tokens, such as stablecoins, payment tokens, utility tokens, and derivatives.
- DeFi Activities and Applications: DeFi activities and applications are diverse, including trading, lending, governance, investment, payments, insurance, and prediction markets. For example, decentralized exchanges (DEXs) enable permissionless trading; lending includes over-collateralized and under-collateralized loans; and governance is carried out through decentralized autonomous organizations (DAOs).
- DeFi Risks and Regulation: DeFi faces various risks, including endogenous risks (such as smart contract vulnerabilities and economic flaws) and exogenous risks (such as regulatory risks and market manipulation). Globally, regulatory measures for DeFi are gradually strengthening, with different countries and regions adopting different approaches, such as token classification and requirements in the US and EU.
- DLT in Traditional Finance: DLT has significant applications in traditional finance, such as central bank digital currencies (CBDCs), asset tokenization, deposit tokens, and institutional DeFi. CBDCs are issued by central banks and differ from stablecoins; asset tokenization enhances asset liquidity; deposit tokens are a new financial instrument; and institutional DeFi offers a pathway for traditional institutions to engage in DeFi.
- Future Outlook: DeFi may develop into different scenarios, such as “The Wild West,” “Citadel,” and “Bazaar.” As technology evolves, DeFi is expected to better integrate with traditional finance, bringing more innovation and transformation to the financial industry.