Economic Insights — Decentralized finance boomed in 2021 but faced headwinds thereafter. Proponents argue that it’s still destined to be the next big thing. Doubters think its promise is overstated.
Decentralized finance (DeFi) is a system of financial platforms built on public blockchains—immutable, open-access ledgers that record the ownership of cryptocurrencies and other digital assets. DeFi’s proponents argue that it outperforms traditional finance (TradFi), which they say is rife with inefficiencies and rent-seeking intermediaries. But will DeFi’s automated transaction technology really result in lower fees charged to users? Will its decentralized ownership structure succeed in redistributing decision-making power to users? To answer these questions, and to judge the merits of the pro and con arguments, we compare DeFi to TradFi in terms of costs and of ownership structure.
This article appeared in the First Quarter 2024 issue of Economic Insights. Download and read the full issue.
