Have you Seen This Fed Report? Here Are Their Plans for Defi!!

Cryptocurrency’s purpose is to replace The existing financial system this not Only includes replacing fiat currencies With hard money like btc but also Replacing financial intermediaries with D5 protocols This makes d5 protocols direct Competitors to commercial banks and Central banks and that’s why the report About d5 recently published by the United states federal reserve is so Significant Today i’m going to summarize what the Fed’s defy report says in simple terms Give you my thoughts as we go along and Tell you what it could mean for the Crypto market The fed’s defy report is titled quote Decentralized finance defy Transformative potential and associated Risks it appears to have been written in June but was only published late last Month i’ll get into why that might be a Little later in any case you can find The full text in the description So the report begins with a brief Overview wherein the authors effectively Reiterate what i mentioned a few moments Ago quote D5 products and services are conducted Without a trusted central intermediary Such as a bank and they include payments Lending and borrowing trading and Investments capital raising crowdfunding

And insurance as a fun fact crowdfunding Via cryptocurrency icos is considered to Be one of the most powerful tools in Cryptocurrency as it allowed both crypto Projects like ethereum and Cryptocurrency exchanges like binance to Get off the ground Given that retail investors arguably Have a tendency to crowdfund projects That seek to disrupt the status quo it Should come as no surprise that Countries around the world seem to be Moving towards restricting retail access To cryptocurrency more about that in the Description Now what’s interesting is that the Authors seem to consider bitcoin to be The first d5 protocol as it made it Possible to send and receive btc Payments in a trustless manner This is consistent with the author’s Definition of defy i mentioned a few Moments ago but interesting nonetheless The authors point to the proliferation Of smart contract cryptocurrencies as The precursor to the explosion of Decentralized finance which makes sense Given that extensive programmability is Required for most d5 protocols to work The authors note ethereum as being the Most popular smart contract Cryptocurrency for defy but acknowledge That avalanche and solana are starting To become popular as well

They also acknowledge that many d5 Protocols have gone multi-chain before Going on to highlight the 224 billion Dollars in total value locked in d5 Protocols a figure which was obviously Recorded earlier this year Even though this figure is still a Fraction of the global financial system The author’s caution that defy is Growing very quickly and i suppose it Was until may Now while the author’s caution that defy Is growing quickly they don’t seem to be All that concerned and that’s for one Simple reason scalability Smart contract cryptocurrencies can’t Currently scale to support global Adoption but the authors believe they Could with the right scaling solutions The authors then outline two scenarios They foresee when it comes to defy Adoption either defy evolves to become Interoperable or even integrated with The existing financial system or it Evolves to become its own financial System which would be the preferable Outcome for crypto in my opinion As far as the authors are concerned Which of the two scenarios unfolds is Ultimately irrelevant as they both pose Financial stability concerns especially Since there is a lack of regulation Around d5 in other words we can’t Control it so it’s bad regardless of

What it becomes They go on to lament how whereas Centralized entities in the crypto Industry are easy to regulate Decentralized entities can’t be coerced With questionable laws and even more Questionable sanctions including some Defy protocols i’m being hyperbolic of Course but you get the point The second part of the fed paper is About blockchain basics and the way the Authors explained blockchains and smart Contracts was peculiar to say the least For example quote consensus protocols Regulate the way in which updates to the Dataset are proposed reconciled and Recorded while ensuring that no other Previously validated data have been Altered This immediately reminded me of a defy Report by the bank for international Settlements wherein the author explains How d5 protocols will exist on Permissioned distributed ledgers run by Banks with regulations at the protocol Level More about that crazy report in the Description Now the authors go on to explain how Blockchains work and i won’t bore you With the details there however i will Commend them for acknowledging that the Bitcoin blockchain became the first Blockchain when the first bitcoin block

Was mined in 2009 bravo Quickly note that blockchain is a term That’s often used interchangeably by Institutions to describe both Cryptocurrencies and the permissioned Distributed ledger systems that are Operated by centralized entities in this Case it seems the authors are using the Term correctly which i again commend Them for They then turn to the topic of smart Contracts and i won’t bore you with the Details here either however i will again Commend them for underscoring the Importance of composability and Acknowledging that oracles are required To make most d5 protocols work This makes me worry that they could go After popular oracles like chain link Etc to apply regulations to d5 but Let’s not go there yet Now the third part of the fed paper Talks about quote defy products and Services and i must admit i take issue With the title there because a product Or service implies that an intermediary Of some kind is involved which is simply Not the case with d5 protocols The authors start by repeating that Ethereum is currently the most popular Smart contract cryptocurrency for d5 but This time add the binance smart chain And cardano as two additional smart Contract cryptocurrencies that are

Increasing in popularity respect What’s interesting is the authors note That quote many dapps provide discreet Services rather than complex bundles of Products this is interesting because Central banks seem to be obsessed with The idea of a one-stop shop for their Upcoming central bank digital currencies Or cbdcs As it so happens the authors also note That quote New protocols are beginning to offer a Combination of several products in an Attempt to become a one-stop shop for Financial services This makes me wonder whether they’ll Start going after these kinds of defy Protocols more aggressively What’s even scarier is that the authors Single out make a dao when discussing Governance in d5 this is scary because Make a dao makes it possible to mint a Decentralized stable coin called die Using cryptocurrency as collateral Once upon a time most of the dye was Largely collateralized by eth but today It’s mostly collateralized by circles Usdc a centralized stablecoin Circle’s response to the recent Sanctions against tornado cash have Consequently led to concerns that make a Dao could be next on the regulatory Chopping block more about what happened To tornado cache using the link in the

Description Now what’s reassuring is that the Authors actually seem to be somewhat Supportive of d5 as they provide some Recommendations for how it could be Improved including the introduction of More real-world assets the creation of More robust stable coins and the Introduction of cbdcs That last one threw me off because the Authors literally suggest that quote the Creation of a central bank digital Currency cbdc that becomes available on Public permissionless blockchains such As ethereum may also serve to reduce Volatility I’m not sure how i feel about that if I’m being honest Now the authors end this section with Another insightful comment and that’s That quote The direct implication of a fast growth In d5 predominantly driven by wholesale And possibly institutional investors Would be the relevance of financial Stability considerations put differently They’re concerned that too much Institutional interest in d5 could pose A threat to financial stability Revealing that this is a very real risk That central banks are concerned about Take a second to consider that this Suggests defy adoption is much more Significant than we think

Anyways the authors then go on to Describe some subcategories of defy in Detail These are Borrowing and lending protocols Decentralized exchanges or dexes Derivative dexes payment protocols and Asset management protocols When it comes to borrowing and lending Protocols they point out that about a Fifth of all the total value locked in Defy is coming from this specific niche Note that these statistics are from Earlier this year but it looks like this Market share still stands today What’s odd is that the authors note Quote fees are often denominated in a Platform’s governance token which is Certainly news to me as far as i know All transaction fees on almost all Borrowing and lending protocols are paid In the native cryptocurrency coin of Whatever blockchain they’re on After describing what appears to be Rva’s innovative safety module the Authors note that quote lenders may earn An interest rate that exceeds rates Offered by banks on sovereign currency Denominated deposits which is a big No-no because it creates competition for The big banks What’s impressive is that the authors go As far as explaining rva’s flash loan Functionality though they again fail to

Mention the d5 protocol by name This is forgivable however as they Emphasize that there are quote Legitimate uses of flash loans such as Swapping out cryptocollateral on a debt This is significant because flash loans Have been the subject of regulatory Scrutiny due to their use in extreme Arbitrage trades that have resulted in Billions of dollars of damage to d5 Protocols with sub-optimal oracles more About that using the link in the Description I also couldn’t help but notice that the Authors included make a dao in their List of borrowing and lending protocols Some would say that make a dao is Technically a collateralized debt Protocol but Let’s not split any more hairs When it comes to dexes the authors point Out that related protocols make up the Lion’s share of the total value locked In defy and briefly explain how dexes Work you know liquidity providers ratio Of two assets in a trading pool Determining their price liquidity Providers earning trading fees etc What’s strange is that the authors refer To liquidity providers as quote Investors and trading fees as quote Interest like yield This is strange because it’s the type of Language that anti-crypto regulators

Like the sec routinely use when Justifying their crackdowns on crypto Projects Probably nothing on a more positive note The authors correctly state that quote Unlike centralized exchanges dexes never Take custody of user funds which is Important because some centralized Exchanges have been hacked which Resulted in a loss of customers Cryptocurrency preach What’s unfortunate is that the authors Don’t spend too much time talking about Other dex-related innovations such as Stable coindexes like curve finance and It’s vote escrow liquidity mining but i Suppose there’s a time and a place for That degree of detail The section on derivative dexes is even Shorter and i suspect this is because The authors don’t want to give the Relevant crypto projects too much Advertising after all derivative dexes Make it possible to quote get price Exposure to other digital assets Currencies commodities stocks and Indices As far as the powers that be are Concerned all these investments should Only be accessible via a regulated Intermediary hence why regulators came Down hard on all cryptocurrency Exchanges offering tokenized stocks last Spring and summer

Luckily for the incumbents derivative Dexes seem to be the least popular defy Niche accounting for the smallest slice Of the pie according to the author’s Again outdated estimates which still Seem to hold true The authors also touch on the use of Leverage in derivative dexes and touch On decentralized prediction markets Which have been subject to lots of Regulatory scrutiny in recent months When it comes to payment related d5 Protocols the authors define these as Being designed to quote overcome one or More obstacles posed by decentralized Technology including issues with Efficiency interoperability and privacy To provide a user experience that mimics Payments in traditional finance accurate They then go on to explain how tornado Cache and flexa network work which is Slightly suspicious given that tornado Cache got sanctioned and flexor Network’s amp token was recently Delisted from a series of crypto Exchanges after the sec called amp a Security in an insider trading case Against a coinbase employee more about That in the description The authors also touch on bitcoin’s Lightning network which is extremely Underrated more about that in the Description too Now when it comes to asset management

Related d5 protocols the authors quickly Explain that these d5 protocols Automatically redirect any crypto Deposited into them to wherever they Will earn the highest yield among other Things What caught my eye is that liquid Staking protocol lido finance was at the Top of the list potentially Foreshadowing regulatory scrutiny for Ldo Let’s hope i’m just seeing things Because if this happens it could be very Bad news for ethereum once it Transitions to proof of stake in the Next week or so and yes you can learn More about that using the link in the Description it’s always there isn’t it Now the fourth part of the fed’s report Concerns the risks associated with defy And it should come as no surprise that This is the longest section of the Report by a wide margin The authors commence by acknowledging That d5 presents quote interesting Opportunities for lowering costs Expanding access and increasing Transparency And reiterate that defy is still small Relative to the financial system it Seeks to replace Logically the authors admit that a Disruption to defy at this point in time Would therefore probably have next to no

Impact on financial stability but again Reiterate that its rapid growth could Pose future challenges to financial Stability if left unchecked What’s funny is that they say quote the Current developments in d5 have the Potential to trigger a d5 version of a Financial crisis possibly with Spillovers to the traditional financial System this is funny because that’s Basically what happened when terror Imploded in may and defy is doing just Fine thank you very much The authors then point to high leverage As an area of concern since high Leverage has historically been a primary Factor in financial crises they also say The same for illiquidity aka the Inability to sell a large amount of an Asset at the same price without crashing Said price What’s hilarious is that the author’s Caution that defy could cause financial Stability issues while simultaneously Claiming that quote the overwhelming Majority of the losses in the Traditional financial system associated With op risk are merely a cost of doing Business double standards much You know i think u.s senator pat toomey Said it best quote failure should be an Option For reference this was pat’s response to Terror’s catastrophic collapse just goes

To show you how investor protection is Often an excuse for financial control End of rand Now to the author’s credit they admit That quote defy can reduce some Operational risks inherent in Traditional finance particularly those Associated with reliance on Centralization of financial Intermediation activities However they caution that defy protocols Present new risks The authors then go on to list all the Benefits of defy and the first is that Blockchains make transaction settlements Near instant By contrast transactions in the Traditional financial system can take Days to clear or more especially if You’re dealing with more elaborate Investment vehicles Another benefit is that all transactions On cryptocurrency blockchains are Publicly viewable this makes it easy for Investors and regulators to assess the Current state of the market namely the Status of market participants and any Potential risks they’re experiencing Now if you think that this isn’t Possible because cryptocurrency is Anonymous think again In the words of the authors quote Pseudonymity does not necessarily Guarantee true anonymity in practice

Blockchain analysts have found that it Is often possible to associate an Address with a specific person or Institution by observing transaction Counterparties and amounts associated With addresses If you’re wondering how blockchain Analytics companies track crypto Transactions you can find out using the Link in the description i digress Now a third benefit of d5 the authors Identify is auditability Cryptocurrency blockchains allow us to Check the accuracy of financial Statements from individuals and Institutions and make it possible to Assess the security of the smart Contracts that make up d5 protocols The authors also touch on something That’s often overlooked and that’s that Most individuals and institutions aren’t Fans of this transparency as it exposes Sensitive information about their Finances As far as i can tell this is why there Has been institutional interest in Crypto privacy despite the regulatory Concerns Now the fourth benefit is somewhat Unfortunate as it has to do with Cryptocurrency’s censorship resistance Which has come into question on ethereum After supposedly decentralized crypto Platforms protocols and even crypto

Wallets blocked access to tornado cache And any associated wallets The authors seem to reference this Reality by noting that dap creators can Decide which transactions to accept or Reject and even go as far as suggesting That quote a government could limit a Firm’s ability to use defy to avoid Sanctions by ordering the firm’s Suppliers to only accept payments coming From approved blockchain addresses Yikes After pointing out that bitcoin and Ethereum have yet to experience any Censorship at the blockchain level the Authors go on to state that quote Immutability is not necessarily a Benefit in all cases as blockchain Transactions that involve fraud or theft Might not be reversed as quickly or Easily as they would be in traditional Finance which is fair but also Terrifying and also not crypto This ties into the long list of risks The authors see with defy and the first Is the consensus protocols of the smart Contract cryptocurrency blockchains Themselves The authors note that these are Corruptable if more than 50 of the hash Power or stake is controlled by a single Entity or set of coordinated entities Now if you watched our recent video About kraken’s crypto consensus report

You might recall that the corruption for Many proof-of-stake cryptocurrencies is Actually much lower at around 33 percent Meaning any proof-of-stake smart Contract cryptos carry even more risks Than their proof-of-work counterparts The second risk is similarly simple and That’s errors in smart contract code As we’ve seen incorrectly written code Is eventually exploited and this often Results in a massive loss of funds The silver lining is that the Traceability of most crypto transactions Means many of these funds can be found And returned The authors also take time to caution That audits are not evidence that a Smart contract is secure and this is Something that yearn finance founder and Phantom developer andre cronier said Many times i wonder what he’s up to These days Anyhow the authors continue by noting That the conditions of a smart contract Must be predetermined and are permanent This means that it’s not possible to Write say a smart contract whose terms And conditions can be easily changed Like a real world agreement The third risk is that you could lose Your crypto forever if you send it to The wrong wallet address or lose access To your crypto wallet which is just part And parcel of being a responsible

Self-custodial adult really The fourth risk involves transaction Ordering this includes everything from Transaction fee competition to minor Extractable value or mev which is where Miners reorder transactions to benefit Themselves rather than process Transactions in order of transaction Fees as they’re incentivized to do The fifth risk is one i alluded to Earlier and that’s oracles Any issues with the oracle’s providing Pricing data to d5 protocols means there Could be serious threats such as flash Loan attacks between dexes from d5dgens And unwanted liquidations in borrowing And lending protocols The sixth risk is especially relevant These days and that’s liquidity the tldr There is that many d5 protocols need Large amounts of liquidity aka crypto to Function properly an absence of Liquidity can cause serious issues such As price slippage on decentralized Exchanges I’ll quickly note that a lot of the Liquidity in defy comes in the form of Centralized stable coins as per ethereum Creator vitali bhitarian’s own admission This gives centralized stablecoin Issuers significant say in future forks And changes as they could decide not to Support the blockchains they don’t like Now the seventh risk is straightforward

And that’s regulation I think the authors summed it up quite Well with quote Regulation may facilitate the growth of Financial activities by providing Increased confidence to potential users Of the services but it can also have Unintended adverse consequences for Existing defy and its future development In the next subsection the authors Examine defy risks that aren’t directly Related to d5 protocols and they start With a bold claim quote the goal of Achieving a truly trustless financial System is unlikely to ever be fully Realized the authors say this because it Will eventually become impossible for The average person to be a minor or Validator for a cryptocurrency and i Would argue that this ultimately depends On how the cryptocurrency is designed An easy fix would be to have a trustless Base layer with trusted layers on top The authors then turned to the topic of Cryptocurrency governance and seemed to Send a warning to unnamed crypto Projects quote Even when the final control over changes To a blockchain’s protocol resides with A decentralized group of stakeholders The group that founded the blockchain Often still exercises substantial Influence over its evolution This is significant because the idea

That an identifiable third party is Driving the expectation of profit from Investing in a cryptocurrency is how the Sec decides to go after crypto projects At least in theory I reckon we can all think of a few Crypto projects which meet that above Description The authors continue by correctly Identifying the trade-off between Centralization and decentralization Namely that centralization makes it easy For a crypto project to change and adapt But also goes against the core values of Cryptocurrency and eats away at the very Things that make cryptocurrencies Valuable here the authors reveal that The biggest governance related risk has To do with blockchain forks wherein two Corners of the same community with Opposing views decide to go their own Way This can negatively impact the safety of Both crypto projects as well as the Liquidity on their blockchains The authors go on to discuss the Governance of decentralized applications And warned that the centralization of Token holders for some decentralized Autonomous organizations means that They’re quite centralized in practice Note that one percent of token holders Have 90 voting power in most dows What’s wild is the authors warn that

Quote this risk suggests that should Financial regulators gain authority over Finance conducted on blockchains they Should have similar authority over On-chain protocols controlled by Centralized groups Now call me crazy but i think that the Authors are saying that regulators could Potentially become active participants In decentralized autonomous Organizations That said i’m sure this is meant to mean That regulators will treat more Centralized dows with the same scrutiny As centralized crypto companies After discussing the risk of governance Attacks on decentralized applications The authors return to the topic of Censorship resistance and make a pretty Ridiculous claim Quote Governments may have legitimate reasons For censorship Let me remind you that the fed is based In the united states The authors continue by saying that There’s a case for censorship at the Blockchain level because Cryptocurrencies are being used by Criminals and countries the united States doesn’t like ironically the Authors note immediately after that Quote some blockchain finance operations C phi and d5 are likely to be based in

Jurisdictions with varied interests in Supporting u.s regulatory goals figures Another non-defy specific risk the Authors identify is the composability of Smart contracts which can be a blessing When the markets are rallying but a Curse when the markets are crashing That’s simply because composability Makes it possible for volatility to Become more widespread in d5 the authors Go as far as suggesting that defy Developers quote invest less than the Optimal amount in security which is not The case as far as i can tell In the free crypto market secure User-friendly useful and profitable Projects eventually succeed full stop The final area of risk the author’s Examine relates to the interaction of Cryptocurrency and the traditional Financial system They begin by saying that it’s more than Likely that crypto will exist alongside The traditional financial system for Some time regardless of whether it Succeeds in replacing it this presents a Series of risks and the first is of Course stable coins like tethers usdt Which hold hundreds of billions of Dollars of real-world assets as Collateral to back the stablecoin tokens In circulation mostly u.s government Debt A run on usdt or any other stablecoin

For that matter could therefore create Serious issues for both crypto and the Traditional financial system which is Why the european union is working to Implement a cap on stablecoins as part Of its upcoming regulations more about Those in the description The second risk is the exposure that Entities in the traditional financial System have to cryptocurrency and here The authors say something disturbing Quote As banks and other intermediaries get Deeper into providing crypto services And loans to crypto users these banks May not fully appreciate the risks they Are incurring Now i’m sure i’m just hearing things but It really sounds like the authors are Saying that crypto users and investors Themselves present a risk to the Traditional financial system due to the Fact that they interact with traditional Financial services as part of their Activities This would actually be consistent with The end game of the financial action Task force or fat f which is to make it Impossible to access cryptocurrency Without an intermediary by labeling Disintermediated activities as high Risks more about that in the description What’s funny is the authors also note That intermediaries in the traditional

Financial system could end up being sued By disgruntled crypto users in the event That they can’t pin down a centralized Individual or institution behind the Crypto project or protocol which caused Them pain Well i’ve yet to see that happen So this brings us to the conclusion of The report where the authors mostly Reiterate what they mentioned earlier Namely that defy is growing rapidly and Therefore requires regulation asap What’s worth noting is that the authors Specified that there are quote unique Concerns arising from the development of Defy especially the governance of the Code used in dapps This again suggests that crypto projects With centralized governance mechanisms Could soon come under fire And with that i must say that i’m Impressed it sounds like the folks over At the federal reserve know their way Around the crypto industry Now this is definitely a double-edged Sword because as awesome as this Awareness is it also means that the fed Knows where to direct regulators and Lawmakers On that note i don’t think it’s a Coincidence that the fed waited until August to release this report The sec seems to have a habit of Engaging in many enforcement actions

When its fiscal year ends in september As such the purpose of the fed report Could be to guide them in their crypto Crackdown Alternatively the fed could simply have Been providing the information that was Requested by u.s president joe biden in His executive order about cryptocurrency Earlier this year if you watched our Recent video about important september Updates on coin bureau clips you’ll know That the deadline to submit regulatory Recommendations about cryptocurrency was The 5th of september as such the fed Report could have been a last-minute Submission of sorts In any case the fed report is almost Certainly bullish for cryptocurrency i Mean did you ever think that you’d see Bitcoin ethereum cardano and solana in a Report from the central bank of the United states heck they even mentioned Ave curve finance and lido finance If that is not a sign that crypto is Slowly taking over i don’t know what is As per a recent coindesk article crypto Is officially in the quote then they Fight you faves a phase that’s followed By an epic victory as per the old adage Make no mistake however the incumbents Will not go quietly i expect to see some Seriously insane announcements from u.s Regulators in the coming weeks and Months and they’re almost guaranteed to

Do unprecedented damage to the crypto Market still it’s not going to stop the Trend of crypto adoption and when the Next bull market inevitably comes around We could hit the critical mass required To create a parallel system that can’t Be crushed by regulations or Institutional market manipulation mark My words that day will come And that’s all for today’s summary of The feds defy report if you found it Insightful smash that like button to let Me know don’t forget to subscribe to the Channel and ping that notification bell So you don’t miss the next video If you want more from the coin bureau The coin bureau clips youtube channel is Where you should go you can also tune Into the coin bureau podcast if you want To learn about crypto while you’re on The go If you want to keep up with me follow Along on twitter tiktok and instagram And get your daily dose of crypto Updates by joining my telegram If you want to know which cryptos i hold As part of my portfolio you can find out By subscribing to my weekly newsletter Where i also give you my forecast for What comes next in the crypto market If you want to support the channel head On over to the coin bureau merch store To get some crypto themed hoodies and Socks to stay warm during the energy

Shortages this winter sorry bad joke You can find your way to these resources And more by using the links in the Description as always thank you so much For watching and i will see you next Time adios adios vida zayn Goodbye [Music] You