In 2015, MakerDAO introduced what would become known as “decentralized finance”, commonly dubbed DeFi. “With DeFi, you have complete access” is a common saying in the cryptoverse.

It now accounts for more than $200 Billion and has been praised as having revolutionized the traditional financial sector. Hilary Allen, an associate professor at Washington College of Law explores DeFi’s unspoken parts.

A Decentralized Illusion

Professor Allen’s paper argues that DeFi does not have a central control as many users believe. She claims that most DeFi protocols can be controlled only by a small group of developers and venture capitalists.

She further argues that, unlike with the traditional banking services that provide consumer protection, with DeFi, you can’t make a call to request a refund when something goes wrong.

Professor Allen further asserts that, “DeFi innovation has limited benefits for society.” She argues that DeFi should be stifled, but doesn’t hold much hope that regulators will follow her advice.

A Repeat of 2008 could be possible with DeFi

Allen believes that if financial institutions embrace DeFi – by offering stablecoins, for example, or supporting DeFi loans – we could see a repeat of the 2008 financial crisis.

DeFi can also be compared with credit default Swaps (CDS), and mortgage-backed Securities (MBS), both of which contributed to the financial meltdown that occurred in 2008.

Flipside

• Contrary to Allen’s view, many investors and market analysts have called DeFi the “biggest thing in the history of finance.”

What You Need to Care About

As many other people, Professor Hilary Allen shared her concerns and opinions about DeFi’s nascent industry in a paper. As such. This should not be considered as investment advice.

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