According to a Goldman Sachs report released on Friday, Decentralized Finance (DeFi) can provide certain advantages over traditional finance.
According to the report by Zach Pandl, co-head of foreign exchange strategy for Goldman Sachs Research, and Isabella Rosenberg, a foreign exchange analyst at Goldman Sachs, DeFi is easier to access for underbanked populations and provides faster settlements for users, but it’s still a work in progress with flaws like hacks, bugs, and “outright scams.”
Other structural differences and advantages of DeFi include unique products, a faster pace of innovation, greater transparency, greater efficiency, and lower cost cross-border payments, according to the company. According to the report, all of these factors will continue to pose challenges for the DeFi community as it faces headwinds from policymakers concerned about consumer protection.
Regardless, they claim that the narrative surrounding DeFi has shifted from whether or not these decentralized products can work to how they can continue to grow and scale.
According to the report, “the DeFi market has expanded dramatically since the middle of 2020 — roughly 10x on the most common summary measure.”
According to the report, the total value locked has increased 900 percent since the DeFi industry exploded, from less than $10 billion in the first half of 2020 to nearly $100 billion today.
They wrote that the growth is most likely a result of yield, with speculative activity also playing a role. “However, user adoption may be related to longer-term trends such as digitalization, globalization, and declining trust in centralized institutions,” they wrote.
While some products are unique to the DeFi ecosystem, they wrote that there are many overlaps with traditional finance. “The main difference is that the marketplace is almost entirely decentralized: there are no banks, brokers, or insurers, only open source software linked to a blockchain,” they continued.
Overall, the innovations in DeFi demonstrate the potential for adoption and disruption in existing financial systems, according to the researchers. “They also show a compelling use case for blockchains and cryptocurrency technology, which should help support market valuations for these assets over time,” they added.