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The Bank of Canada has released a working paper that examines lending protocols in decentralized finance with regard to sources of instability and their relation to crypto asset prices. Its findings point to potential ways to optimize DeFi lending platforms, or possibly the practical 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 smart contract protocols over the use of human discretion — but they also identify the systemic weaknesses of DeFi. Information asymmetry, a key issue for regulators, is highlighted, with the twist that in DeFi, the asymmetry favors the borrower:
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