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Centralized and Decentralized Finance: Coexistence or Convergence?

In: The Fintech Disruption

Author

Listed:
  • Axel Wieandt

    (WHU Otto-Beisheim School of Management
    Northwestern University)

  • Laurenz Heppding

    (Technical University of Darmstadt)

Abstract

The financial crisis of 2007–2008 revealed that centralized finance (CeFi), which relies on large, interconnected financial institutions, is easily destabilized. Since the crisis, significant regulatory tightening, monetary easing, and new competitors (e.g., fintechs) have created significant pressure on profit margins and CeFi business models. Recently, a new form of financial intermediation that functions independently of centralized intermediaries has emerged, namely decentralized finance (DeFi). DeFi relies on public, permissionless blockchains and uses so-called smart contracts to perform financial services such as borrowing, lending, and trading in a transparent and automated fashion. This paper gives an overview of DeFi and discusses its advantages and disadvantages compared to CeFi. In it, we analyze different scenarios pertaining to the future paths of CeFi and DeFi, and conclude that a convergence scenario is the most likely.

Suggested Citation

  • Axel Wieandt & Laurenz Heppding, 2023. "Centralized and Decentralized Finance: Coexistence or Convergence?," Palgrave Studies in Financial Services Technology, in: Thomas Walker & Elaheh Nikbakht & Maher Kooli (ed.), The Fintech Disruption, chapter 0, pages 11-51, Palgrave Macmillan.
    • Handle: RePEc:pal:psincp:978-3-031-23069-1_2
    DOI: 10.1007/978-3-031-23069-1_2
    as

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