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14 Int'l. In-House Counsel J. 1 (2021)
Decentralized Finance and Distributed Autonomous Organizations: On the Rise

handle is hein.journals/iihcj14 and id is 209 raw text is: International In-house Counsel Journal Vol.14, No. 56, Summer 2021, 1 Decentralized Finance and Distributed Autonomous Organizations: on the Rise JOSEPH J BAMBARA Attorney at Law, WithersWorldWide/UCNY, Of Counsel, USA The traditional finance market is centralized. Central authorities issue the currency that powers our economy. Centralized financial organizations, e.g., banks, control our assets. Hence, the ability to regulate the flow and supply of such currencies in the market resides with a central authority. Risk is also at the center. The centralization of authority and practice across the financial system has led to a potentially unmanageable level of complexity. Complexity at this magnitude creates risk. Unchecked risk will increase creating new vulnerabilities. This coupled with a lack of transparency compounds the problem. For example, if central banks print more currency to handle a financial crisis and it does not resolve the crisis, it may result in extreme inflation disrupting an entire economy. A potential solution is to decentralize. Cryptocurrencies like Bitcoin, Ether and hundreds of others offer secure decentralized peer-to- peer trading without intermediaries. Here users have control over their crypto assets. Unfortunately, cryptocurrencies have not decentralized the financial system. While the cryptocurrencies are decentralized, they are typically accessed via centralized access points such as exchanges. So how will we move towards decentralized finance? From stable coins, decentralized exchanges and wallets to payments networks, lending and insurance platforms, key infrastructural development, marketplaces, and investment engines the decentralized finance (DeFi) ecosystem is the way forward. DeFi utilizing technology implemented using a blockchain based ecosystem will provide the user with full control of their assets. It will add transparency, stabilization, and efficiencies to global finance. DeFi also referred to as open finance is an ecosystem where blockchains, digital assets, open protocols are integrated with conventional financial structures. DeFi includes smart contracts, and distributed applications (dApps) built on a blockchain. Currently, the Ethereum platform is the primary choice for the DeFi. Why: because many dApps have been built using Ethereum and Solidity smart contracts so there is a large pool of talented developers. Additionally, these development projects breed composability. A DeFi platform is composable if its existing resources can be used as building blocks and integrated into higher order dApplications. Composability leads to rapid and compounding innovation. The fact that most DeFi protocols are open source, i.e., freely available, developers across the globe can collaborate to create new products leading to innovation, maturation, and a secure network. Composability create the MetCalfe network effect, i.e., the value of goods or services grows as the number of users increases. The DeFi ecosystem categories include infrastructure, know your client (KYC) / identity, custodial services, payments, investing, derivatives, marketplaces, stable coins, prediction markets, insurance and credit and lending. Stablecoins are blockchain-issued tokens designed to hold on to a specific value. This is usually done by pegging it with fiat currencies like the US dollar, or other relatively stable assets like gold. Stablecoin incorporates collateral to accommodate for the price variation. Fiat- collateralized stable coins store their value in fiat currencies and are ISSN 1754-0607 print/ISSN 1754-0607 online International In-house Counsel Journal

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