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Decentralized Finance Made Simple: What Lawyers Need to Know

June 17, 2021

By Daniel B. Garrie & Hon. Gail Andler

Decentralized Finance

DeFi is highly attractive and quickly growing; however, the entire concept is still relatively new. While understanding how it works and its benefits is essential, it is equally critical to examine the possible risks and challenges it presents.

While the word Bitcoin has not yet made it into the everyday parlance of many attorneys, most generally understand that it is a cryptocurrency that isn’t controlled by any bank or government and can be sent to anyone without the need of a financial institution as the intermediary. Bitcoin, as a result, is a form of decentralized money or cryptocurrency. However, the financial services used by, and available to, the public today extend far beyond just the transfer of money. Additional money-related services that exist in our financial system include options such as taking on credit, obtaining insurance, investing in the stock market, and having savings plans.

As it stands, our existing financial system, along with all of its services, is entirely centralized. Financial institutions, including banks and the stock market, all have an individual or company in charge of controlling and offering its services. A centralized financial system like this inherently involves taking on certain risks. For example, those left in charge may mismanage the institutions or be involved in fraudulent or corrupt activities. The centralized financial system also presents issues such as censorship and lack of transparency. How does this change, though, if the financial system itself is decentralized in the same way Bitcoin decentralized money?

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