The 2008 financial crisis damaged the reputation of banks and raised doubts about their trustworthiness. People were wary of keeping their money in banks and looked for alternatives. Then, in 2008, a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was released by a pseudonymous entity named Satoshi Nakamoto. This white paper introduced the concept of decentralized consensus, which allowed for a trustless economic system. Bitcoin-based businesses started to emerge, but Bitcoin did not replace the traditional financial system.
The advent of Ethereum brought more possibilities to blockchain technology, including smart contracts that offered new banking services. However, investing in decentralized finance (DeFi) carried significant risks. There were cases of fraud and loss of funds with little recourse for investors. Decentralized lending and margin trading posed additional risks. Despite these challenges, DeFi has the potential to offer unique advantages over traditional banks.
According to Danny Chong, head of Tranchess, DeFi can do many things better than banks but still lacks proper risk management. Banks have well-established risk frameworks that protect against failure, while DeFi is still in its early stages. Chong believes that instead of trying to replicate what banks do, DeFi should focus on maximizing its strengths and improving risk management.
Chong sees PayPal’s PYUSD stablecoin as a positive development for DeFi as it may attract e-commerce customers who are not familiar with blockchain. He envisions a future where DeFi can expose investors to large investments through tokenization of real-world assets.
However, Chong acknowledges that DeFi is currently like the Wild West and needs rules to manage risk and protect investors. Rules and regulations may be necessary to fully realize the benefits of DeFi while minimizing risks.
In conclusion, while DeFi has the potential to revolutionize finance, it still needs to address issues related to risk management. Rules and regulations may be necessary to protect investors and ensure the long-term success of decentralized finance.
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