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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
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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