The blockchain universe, specifically the decentralized finance (DeFi) realm, has been enduring waves of upheaval. After the collapse of Terra, a method to identify key focal points or ‘systemically significant’ entities in the global DeFi nexus has become indispensable. Providing a solution, Kanis Saengchote of Chulalongkorn University, Thailand has designed a protocol to identify and measure potential systemic risk in DeFi institutions.
The newly framed dialogue, dubbed the Global Systematically Important Protocol (G-SIP), draws inspiration from a similar endeavour undertaken by traditional banking after the 2008 banking crisis. Their end product, an identification and measurement system for ‘global systemically important banks’ (G-SIBs), played a pivotal role in identifying vulnerabilities and setting improved standards for loss protection.
Bringing this concept into the blockchain arena, Saengchote’s research offers a comparable benchmark for ‘blockchain banks’, or any DeFi protocol operating on a blockchain. The paper attests that such identification helps handle emergencies and manage systemic risks due to the ‘self-reinforcing nature of financial interactions and fire sale-induced deleveraging.’ Such cases were witnessed in the Terra collapse, generating fearful loops that pushed protocols into a ‘death spiral’, causing a market-wide swipe at below-par values, promoting liquidity crises in the affected ecosystem.
Saengchote’s investigation also identified four different protocols associated with blockchain banks on the Ethereum network, assessing their level of influence and interaction and providing a risk profile. Based on the findings, MakerDAO scored highest due to its complexity and interconnectedness and accordingly, had higher capital requirements to counter potential risks.
This revelation may prove crucial in preventing market crashes, demonstrating the potential of blockchain technology. Nevertheless, it also conveys a sense of skepticism as it exposes the inherent risks and complex dynamics within decentralized finance. The ability of a single protocol to potentially tip the scales of an entire market delineates the careful thought and robust frameworks needed to ensure blockchain’s safe integration into the financial scene.
In parallel, Elon Musk‘s influence breaches the boundaries of the crypto-sphere into the world of social networking, raising questions about loyalty and trust within the Twitter-esque platform ‘X’. The association between the Blue subscription, cryptocurrencies, and political extremism gives the checkmark symbol a negative connotation, reminding us that the road to mass adoption of new technologies often encounters pockets of skepticism and resistance.
Ultimately, these instances remind us of the intriguing layers and enthralling potential of the blockchain universe. They push us to look at both sides of the coin, weighing the revolutionary capabilities against potential pitfalls. The scale tilts in favor of the optimistic possibilities, leaving us excited to see the unfolding of the blockchain future.
Source: Cointelegraph
