Global banking elites financing development of cryptocurrency

One reason…is because there is lopsided investment. That again underscores that you need a coordinator because you are getting parts of this whole system where a lot of money goes into the mining part [of bitcoin], and very little goes into everything else. Will precisely another currency substitute for all of that?

My answer is, with absolute certainty, no…[T]echnology cannot substitute for all what central banks do to make trustworthy currencies. Still, digital currencies could change the financial system in big ways. Digital currencies and other innovations in payment systems could increase the speed of domestic and cross-border transactions, reduce transaction costs, and eventually broaden access to the financial system by poor and rural households.

In China, in India, one can conduct very small micro-transactions with street vendors using payment systems that have been decentralized and that are intermediated, not through the traditional banks but through other platforms.

And one can see this very easily catching on. Connection to the financial system is a very important part of it. If you feel that the reforms in a country are going to benefit the elite who are connected and most of the others are left out, this is, I think, a very important part of that [frustration. Digital currencies] will give people more access to the financial system…So I think that is at some level a really transformative power in the new technologies.

But these new technologies bring some big challenges too. Digital currencies and related technologies are likely to reduce transactions costs and decrease the price of acquiring and sharing information, which sound good but can destabilize financial markets and intensify contagion from one market to another.

They could undermine the business models of conventional banks and their role in the financial system, making it hard for central banks—which operate largely through the banking system—to maintain financial stability. But as we know from work that many academics have done…you might end up with certain information aggregators becoming very powerful in an economy where there is a lot of information but not very good processing ability, and that can actually lead to situations where, in fact, you have informational cascades, and herding and contingent behavior becomes worse, not because of limited information, but because there is too much information but not enough signal extracting and processing capability.

So in terms of financial institutions and regulation, I think there are many challenges ahead. That could affect not just monetary stability but economic activity as a whole. Should central banks issue their own digital currencies? US Dollar can be attributed to CeFi, as the regular holder of cryptocurrencies needs to use exchanges like Coinbase or Binance which are centralized organizations to swap a unit of a cryptocurrency against another. Now, with the emergence of decentralized exchanges DEX , holders of cryptocurrencies no longer need to leave the crypto space for swapping their tokens.

A prominent example of a DEX is Uniswap. DEX are composed of smart contracts that hold liquidity reserves and function according to defined pricing mechanisms. Such automated liquidity protocols play a key role in the development of an independent decentralized ecosystem without any CeFi intermediaries. Insurances An important function of insurance is to smooth out risks and bring security for market participants.

An example of decentralized insurance is Nexus Mutual , which offers insurances that cover bugs in smart contracts. Since everything is based on smart contracts in DeFi, vulnerabilities in the code of smart contracts is a fundamental risk for DeFi users. Decentralized insurances are still in their infancy, but it can be expected that a larger amount and more sophisticated insurance models have the potential to emerge in the DeFi space in the future.

Central banks So-called stablecoins are based on blockchain protocols that have the principle of price stability inherently encoded and, thus, fulfill the function of a reserve currency. The introduction of stablecoins set the foundation of the functioning decentralized financial system, as they enable participants to engage with each other without the underlying risk of price volatility.

There are three options how a cryptocurrency can reach price stability. First, stablecoins can reach high degrees of price stability by pegging a currency to other assets. From a decentralized finance perspective, another interesting approach is the issuance of stablecoins by using other cryptocurrencies as collateral. Thirdly, there are more experimental approaches that aim to reach price stability without the use of collaterals.

For instance, the protocol Ampleforth automatically adjusts the supply of token in accordance with demand. Crypto-based finance has reached the next maturity stage, as it covers all basic functions of a financial system We argue that DeFi has reached an important intermediate step to become a substitute for traditional finance solutions.

While crypto-based finance solutions were merely capable of realizing efficient value transfers in the past, now the time value of money is reflected in crypto-finance. Three maturity stages of a decentralized finance system Stage 1: Efficient value transfers Until now, centralized exchanges and wallet providers have been the only successful blockchain business models at scale. The reason for the success of centralized exchanges is that they are the main entry point to the crypto space see Figure 1.

The common user needs to swap fiat money e. US Dollar against a cryptocurrency before being able to interact with services in decentralized finance. Furthermore, wallet applications are established that enable users to safely store and transfer their cryptocurrencies. Based on those two applications, exchanges and wallets, efficient value transfers between unknown parties could be conducted for the first time without the need of traditional finance actors.

This enabled the crypto space to fulfill limited functions of a financial system, namely speculation on crypto assets and the facilitation of payments. Thus, disintermediation of financial firms occurred — but only, if savers of traditional finance wanted to diversify their portfolio towards crypto assets or needed a frictionless payment system. We propose this to be the first maturity stage of a decentralized finance system.

Figure 1: First maturity stage - The crypto space as alternative for value storage and payments Own illustration Stage 2: Connecting savers and borrowers Still missing was the ability to deal with flows of funds from savers to borrowers and vice versa. In the following years, additional elements of a more advanced financial system were developed.

Thereby, DeFi developed the necessary platforms for facilitating the flows between savers and borrowers. This can be marked as the second maturity stage of the decentralized finance system. Figure 2: Second maturity stage — Schematic illustration of the interplay between traditional However, DeFi is an encapsulated system, which is not obeying the same rules as traditional finance.

In particular, national law does not apply and regulatory policies can hardly be enforced in the DeFi space. This might be a major competitive advantage over the highly regulated traditional finance firms. For example, financial innovations can be freely developed and implemented in DeFi without regarding regulatory boundaries.

On the other hand, the absence of common legislative and political principles has certainly major disadvantages. It can be doubted that mainstream savers would consider the current DeFi environment a trustworthy destination to invest their pension. Hence, the crucial question for the advancement of DeFi to the next evolutionary stage will be: To which degree are savers of traditional finance willing to relocate their funds towards DeFi applications? To which degree are borrowers of traditional finance willing to access funds from DeFi applications?

To answer both questions at the current point in time: Only to a very limited degree. The reason is that most traditional finance savers or lenders do not trust the crypto space or simply do not know about DeFi. The influx of capital into DeFi applications since June most likely stems from idle assets on crypto wallets, i. Nevertheless, the rising use of DeFi protocols proves that the system is scalable and working.

Today, the users of DeFi belong to the group of "innovators" or "early adopters" i. Tomorrow, the users might be mainstream households.

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