6 The composability 7 of DeFi’s programmatic components allows financial instruments and services to incorporate multiple DeFi services and protocols, which distinguishes DeFi from private services or standalone digital assets.

5 The use of open-source code-meaning code designed to be publicly accessible-allows participants to view and verify protocols directly as well as create derivative or competitive services. DeFi services use a non-custodial design, meaning assets issued or managed on DeFi platforms theoretically cannot be moved or expropriated unilaterally by parties other than the account owners. Transactions are settled on a public blockchain, rather than through a bank or other central institution. DeFi platforms enable users to engage in traditional financial transactions like lending and borrowing through direct peer-to-peer exchanges, eliminating the role of traditional financial intermediaries by directly mediating the transfer of value. DEFI BASICSĭeFi describes blockchain-based alternative finance systems. In this piece, we briefly explore the risks of DeFi as it grows, and, in turn, draws increasing scrutiny from regulators. 2 Earlier this month, he wrote to Senator Elizabeth Warren that both should be among Congress’ legislative priorities, adding that “egulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.” 3 The SEC also brought its first enforcement case against a DeFi platform this month. Since Secretary Yellen’s comments, Securities and Exchange Commission Chair Gary Gensler has made it clear that the regulation of DeFi platforms and stablecoins is on the SEC’s agenda. As a possible preview of the coming regulatory efforts, this past spring Treasury Secretary Janet Yellen urged regulators to accelerate their establishment of a regulatory framework for stablecoins, a rapidly growing class of digital currencies which, among other things, can be used on DeFi platforms to temper pricing volatility. Regulators are aware of this growth and are moving to act accordingly. One use of this technology, decentralized finance, or DeFi, is on the cusp of major growth. Even those who are most suspicious of the rise of cryptocurrency will likely admit that the underlying blockchain technology and its potential uses are exciting.

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