Decoding DeFi: Breaking Down the Future for Decentralized Finance (EventID=117567)

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Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinanci... Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Tuesday, September 10, 2024, at 10:00 a.m. (ET) Subcommittee on Digital Assets, Financial Technology and Inclusion Chair Congressman Hill and Ranking Member Congressman Lynch will hold a hearing entitled, “Decoding DeFi: Breaking Down the Future for Decentralized Finance." ___________________________________ Witnesses for this one-panel hearing will be: ● Brian Avello, Chief Legal Officer, UDHC ● Rebecca Rettig, Chief Legal and Policy Officer, Polygon Labs ● Amanda Tuminelli, Chief Legal Officer, DeFi Education Fund ● Peter Van Valkenburgh, Director of Research, Coin Center ● Additional Witnesses To Be Added ___________________________________ Introduction Decentralized finance (DeFi) is an emerging sector of financial technology and digital assets that utilizes blockchain technology – also known as Distributed Ledger Technology (DLT) – and smart contracts to create permissionless, peer-to-peer financial services systems. DeFi provides an alternative to traditional finance by offering certain services without the need for intermediaries. DeFi projects vary widely in their decentralization and functionality. While some DeFi projects are truly decentralized, others may rely on centralized intermediaries like financial institutions or technology providers. Unfortunately, there are also projects that falsely claim to be decentralized to attract investors and customers, a practice known as "decentralization theater." While the origins of DeFi can be traced back to 2008 with the invention of Bitcoin, it was not until the invention of Ethereum that DeFi protocols were technologically feasible and developed. Two years later, most of the earliest DeFi protocols were launched on top of the Ethereum blockchain network. Although the majority of the DeFi ecosystem still exists on the Ethereum blockchain today, it has also expanded to other blockchains including Polkadot, Solana, Avalanche, and Cardano. Overview of DeFi Technology Currently, there is no universally agreed upon definition of DeFi. At the same time, there are certain characteristics that are emblematic of this technology. DeFi protocols run on top of permissionless blockchain networks and facilitate peer-to-peer digital asset transactions using smart contracts. In a permissionless blockchain, or public blockchain, anyone who wants to transact can utilize the network. Additionally, all users can see all transactions on the blockchain. Since the network is decentralized, parties can transact without the use of a third-party intermediary or central authority to validate the transactions. In contrast, a permissioned blockchain, or private blockchain, is essentially a closed network where only certain participants can make certain additions to the ledger. Because of permissionless blockchains, DeFi protocols are able to function like interoperable building blocks. This composability empowers anyone to freely assemble and customize new financial products and services by combining existing DeFi products and services. When a DeFi transaction is conducted peer-to-peer using permissionless blockchain networks, self-hosted wallets are used by the parties to the transaction. A self-hosted wallet in the digital asset ecosystem means that the private key, which can be viewed as the password to access the user’s digital assets, is controlled and held by the owner of the digital assets. Digital asset wallets can also be hosted, which means that individuals’ private keys are held by a third party. These types of wallets are not typically considered to be DeFi. Smart contracts are computer programs stored on a blockchain that define the terms of an agreement between two or more parties. These contracts execute automatically and without discretion when predetermined conditions are met, eliminating the need for intermediaries. Smart contracts are the fundamental building blocks of DeFi. While the use cases for smart contracts are numerous and still growing in the DeFi ecosystem, some existing applications in DeFi include allowing protocols to automatically execute trades, dynamically adjusting the total supply of stablecoins in response to market fluctuations, managing loan processes by determining interest rates and collateral requirements, and ensuring the secure exchange of digital assets between two parties. Overview of the DeFi Market DeFi has experienced significant growth since DeFi protocols were first launched. Currently, there are hundreds of DeFi protocols deployed across various blockchain networks. There are several metrics used to assess the... ___________________________________ Hearing page: https://democrats-financialservices.house.gov/events/eventsingle.aspx?EventID=412639