Credit Encyclopedia Series: Decentralised Finance
In this edition of Fitch’s Credit Encyclopedia series, we take a broad look at the global Decentralised Finance (DeFi) market. Our comprehensive guide covers everything from the characteristics of the DeFi ecosystem, the ratings considerations, key risk factors and regulatory considerations in the space, and more.
01Table of Contents
- What is DeFi
- Exploring the DeFi Ecosystem
- Defining DeFi and Its Key Innovations
- Corporate Governance Using Software
- Blockchain Networks Compared
- Risks and Regulations
- What Risks Are There Now for FIs?
- DeFi Risks Within the Ecosystem Are Broad
- Regulating DeFi Without Stifling Innovation
02Overview
The driving philosophy behind decentralised finance (DeFi) is for any user to be able to access DeFi as long as they have an internet connection and a compatible electronic wallet. DeFi shuns centralised authorities, is largely unregulated and operates across borders. DeFi apps (dapps) do not generally require “know-your-customer” (KYC) identification reviews or anti-money- laundering (AML) checks, which can aid financial inclusion in jurisdictions with high portions of under- or unbanked populations.
Characterizing DeFi
DeFi participants transact on a peer-to-peer basis, analogous to an over-the-counter swap transaction without a broker/dealer intermediary. Instead of an intermediary, participants rely on defined rules, governed by a consensus mechanism to verify, agree and settle transactions, and therefore automate conventional finance (and business) processes
