- The Bank for International Settlements (BIS) has observed that DeFi can’t be fully decentralized due to oracles
- BIS thinks that the centralization of oracles helps in the adoption of DeFi platforms
- BIS holds that decentralizing an oracle may complicate a protocol hence hindering its adoption
A bulletin by the Bank for International Settlement (BIS) has disclosed that DeFi platforms aren’t fully decentralized due to their use of oracles or third parties that link the protocols to the real world. The bank thinks that centralized oracles aid in the adoption of DeFi projects since decentralizing oracles complicates the projects hence hindering their uptake. BIS also noted that DeFi’s unregulated nature allows malicious actors to take advantage of users, although law enforcement agencies are now taking up cases involving DeFi protocols.
DeFi Increases Risk of Losing Funds
According to the bulletin’s authors, the decentralization aspect of DeFi also means that transactions can’t be reversed, something that increases the risk of losing funds or assets when sent to the wrong recipient.
Crypto based #DeFi relies on oracles to import real-world data into their blockchain applications, but these centralised third parties introduce risks and inefficiencies. Can we overcome these problems? #Decentralisation #Blockchain https://t.co/DjGqTNX4kK pic.twitter.com/OVz57fGtkm
— Bank for International Settlements (@BIS_org) September 7, 2023
The authors noted that embracing fully decentralized oracles is likely to hinder “transaction efficiency and scalability when compared to more centralized alternatives.” Therefore, they proposed that instead of going the decentralized way the security of oracles can be enhanced by adopting a trust-based centralized system.
BIS observed that popular oracle operators such as Chainlink employ Swift’s centralized infrastructure despite marketing their oracles as decentralized.
Financial regulators and law enforcement agencies are increasingly turning their attention to DeFi protocols, with the likes of the Department of Justice disclosing their commitment to clamp down on illicit behaviors in the decentralized world.
Users have Nothing to Hide
The United States Treasury has also commented on the issue noting that DeFi platforms need to implement AML controls to curb malicious actions such as money laundering. The thought was supported by DeFi executives who noted that 99% of DeFi users have nothing to hide.
According to a BlackRock executive, the lack of clear regulations governing the DeFi world prevents conventional institutions from boldly embracing DeFi products.
With BIS taking aim at oracles powering DeFi platforms, it’s to be seen whether oracle providers will adhere to the bank’s recommendations.
