DeFi shadow banking has become one of the hottest trends in finance in the last few years.
Many of the negative features of shadow banking, such as excessive leverage and uncertainty that caused the 2008 global financial crisis, have already penetrated the world of DeFi decentralized finance. Unless regulators increase oversight of this fast-growing sector of the crypto world, the risk to the broader DeFi shadow banking increases. Broadly defined, shadow banking consists of lenders, brokers, and other intermediaries that are not part of the territory of traditional regulated banks. Perhaps the most notorious participants and victims were Lehman Brothers and Bear Stearns, both of which failed to collapse the subprime mortgage market.
1. Lending is one of DeFi primary uses, with over 160 apps that allow you to trade, lend, and borrow, often anonymously, without intervention. Many DeFi shadow banking offers double-digit or higher yields in exchange for borrowing tokens for holders. The total amount of assets “locked” in the DeFi app is about $ 120 billion.
2. Inflows are attracting the attention of more traditional financial institutions. Societe Generale SA is tinkering with DeFi loans. HSBC Holdings PLC just acquired a plot of virtual real estate in the Sandbox metaverse. A slew of financial institutions, such as Silvergate Capital Corp. and a group of small banks, are planning or already issuing their stablecoins, which are widely used to facilitate DeFi shadow banking transactions.
3. There are established financial institutions that are hungry for the money they are making in this area. The concern we see from both a growth perspective and a financial stability perspective in this area is whether financial institutions are profitable in this area. Cryptographic companies that supply institutional investors, such as hedge funds, are already occupying. Genesis Trading, the world’s largest digital asset lender with over $ 150 billion in loans, plans to enter DeFi. Considering a long-term strategy by integrating with DeFi. DeFi shadow banking provides unsecured loans to companies and institutional investors.
4. Alameda Research, one of the world’s largest crypto traders, uses DeFi shadow banking loans to fund some of its $ 5 billion trading activities daily. In January, Fireblocks partnered with lender Aave Arc to allow financial institutions to participate in DeFi.
5. With the emergence of more financial institutions, the problems that have plagued DeFi shadow banking from “rug pulls” to hacks that lead to huge losses, can wipe out traditional finance and even increase the risk of running on the bank. Like shadow banking before the financial crisis, DeFi is risky and can fail in particularly unpredictable ways. It can lead to financial vulnerabilities in ways we do not anticipate.
6. Stablecoin, which is usually associated with assets such as dollars, is one of the biggest threats. Issuers like Tether have a market value of $ 80 billion, operate as a private company, and do not fully disclose their reserves. It is unclear whether Stablecoin will be converted to fiat money when a crypto exchange is difficult.
7. Like shadow banking before the financial crisis, DeFi is risky and can fail in particularly unpredictable ways. It can lead to financial vulnerabilities in ways we do not anticipate. Many DeFi apps are ultimately controlled by a small group of developers or venture capitalists with large interests.
8. People accept the idea that DeFi contributes to financial inclusion at face value. Given that, I don’t think our proposal will gain political traction until the crisis strikes.