The Bank of Japan identifies the pros and cons of DeFi and mentions Uniswap and yield farming

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June 26, 2023, 6:56 a.m. EDT | 2 minutes read

A report released by the Bank of Japan (BoJ) has looked at the topic of decentralized finance (DeFi) and concluded that while the adoption of DeFi poses certain “risks,” so does greater adoption of DeFi could bring some positive aspects.

The headquarters of the Bank of Japan. Source: Adobe/Leonid Andronov

The report was released by the Bank of Japan's Payments and Settlement Systems Department, which is responsible for developing payments policy at the central bank. The review covered topics such as yield farming as well as the “emergence of autonomous financial services” and the “search for governance” in the DeFi sector.

Media outlet Internet Watch noted that one of the review authors, Junichiro Hatogai, translated the books “Mastering Bitcoin” and “Mastering Ethereum” written by Andreas Antonopoulos into Japanese – calling the volumes “the global bibles of the blockchain industry “. Review co-author Masashi Hojo is responsible for Japan’s joint central bank digital currency (CBDC) project with the EU – called Project Stella.

The review primarily focuses on the issue of governance in the DeFi sector as well as the larger Web 3.0 ecosystem. It concluded that DeFi adoption could “increase rapidly in Japan” and “create new financial services” that meet the needs of a new generation of users.

Internet Watch noted that it was significant that the report's authors mentioned decentralized exchange (DEX) Uniswap and Compound by name, noting: “While this is a review report, it is rarely so specific.” [crypto-related] The project name appears in the BoJ documentation.”

The report identified the following potential benefits of DeFi:

• Increased competition in the financial sector
• The creation of new financial services
• Improved access to financial products and services

But the report also pointed out some potential risks, namely:

• Lack of regulation, which could be problematic with leveraged agreements
• Smart Contract Failure Incidents – Specificity related to issues related to the interaction of smart contracts, of which the authors of the report said they had seen many cases
• Complications related to user protection – due to the lack of centralized audit bodies

The report also addressed the issue of regulatory policy of the DeFi sector, noting that due to the nature of the DeFi industry, it would be extremely difficult to ensure the effectiveness of the regulations imposed by central banks, financial regulators and the government.

The authors also pointed out that the tamper-proof nature of blockchain networks could counteract DeFi in the financial world – since, in extreme cases, a smart contract could trigger a series of “meaningless” automatic program executions that human users would be powerless to stop.
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