Over-collateralization and regulation will limit the continued exponential growth of the DeFi sector in the coming years, according to Morgan Staley analysts.
The experts of the investment bank have said that they have not found much evidence for the thesis that DeFi protocols significantly improve the traditional financial system. They said:
“Projects look like a way to attract cash flows to enrich their operators. DeFi is prone to hacking and the risk of financial crime because of its anonymity.”
The experts have explained that the absence of KYC/AML will limit adoption among institutions, and the integration of these requirements will make DeFi more centralized. They have highlighted:
“Excessive collateral in lending/borrowing does not increase the money supply. Without centralization, DeFi will be harder to consider as an alternative to the current fractional reserve banking approach.”