Bank for International Settlements: Mortgages under DeFi architecture will create a new form of systemic vulnerability

ChainCatcher news, the Bank for International Settlements (BIS) published two papers on Friday stating that DeFi could lead to more turbulence in financial markets and may not resolve the dominance of large intermediaries. One paper examined a unique dataset on collateral liquidation from two major DeFi applications, Aave and Compound, where such liquidation requires arbitrageurs to repay loans in exchange for discounted collateral. The article states: "This contagion to other exchanges can lead to negative feedback loops. Our findings illustrate a new form of systemic vulnerability arising from collateralized loans under DeFi architecture."

Another research paper indicated that DeFi can reduce financial transaction costs but cannot fully address the issue of centralized intermediaries charging excessive fees for services, and it may also evade scrutiny. Without proper rules, regulators will have to rely on "goodwill and voluntary cooperation," or countries may run their own versions of blockchains independently. The paper states: "The current design of DeFi applications poses significant challenges for tax enforcement and exacerbates money laundering issues and other types of financial misconduct." (Source link)