The DSR model: the solution for integrating DeFi with TradFi?

Research into central bank digital currencies is growing as governments increasingly take an interest in this type of digital asset. Speaking of which, the Bank for International Settlements (BIS) is well known for its regular research on CBDCs. Its researchers recently conducted a study that led to the production of a relevant report. The latter deals with the themes of DeFi and TradFi. Here is what he says about the combination of these two concepts.

Applying DeFi notions to traditional finance

Recently, the World Economic Forum (WEF) published a report on decentralized autonomous organizations. At the same time, the BRI released a technical document which is complementary to the work of the GEF. The report indicates to what extent one can apply the notions of DeFi to traditional finance. The BRI has commented on the new working document through a tweet this January 19.

DeFi is a programmable financial ecosystem that allows users to trade, lend, and invest without relying on a central intermediary. This document takes an in-depth look at the underlying technology, its economic potential and the associated risks.“, can we read in the publication.

Details of the BIS

The BRI working paper presents a so-called DSR model that studies the use of DeFi with TradFi. According to this model, DeFi can be subdivided into three layers which are interface, application and settlement. The layers are in turn divided into sub-layers through which there is variation between DeFi technologies.

Would DeFi be a major innovation?

The authors of the new BRI report think it is important to try to combine DeFi and TradFi. They feel that decentralized finance could be very useful to the traditional financial system. They said: “It remains unclear if and to what extent DeFi will proliferate in the future. […] Nevertheless, we see DeFi as a relevant development, as it harnesses innovative technology that could shape the future financial ecosystem.“.

They added: “A thorough understanding of DeFi is still lacking in many circles“. The BRI researchers stressed that it would take “a specific framework for a better practical knowledge of the technology“.

The BIS report discusses the various advantages of decentralized finance, including “competitive financial engineering“. With the working paper, some relatively technical aspects of DeFi become more accessible. The report suggests that this technology could facilitate transactions in TradFi.

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