The Bank of Canada has released a working paper that examines lending protocols in decentralized finance in regards to sources of instability and their relation to crypto asset costs. Its findings present seemingly techniques to optimize DeFi lending platforms, or presumably the excellent limits of decentralization.
The authors of the paper, titled “On the Fragility of DeFi Lending” and released Feb. 22, acknowledge the inclusiveness DeFi offers and the advantages of pleasing contract protocols over utilizing human discretion — nonetheless they moreover name the systemic weaknesses of DeFi. Knowledge asymmetry, a key self-discipline for regulators, is highlighted, with the twist that in DeFi, the asymmetry favors the borrower:
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