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DeFi: developments and risks in the EU market

The article on DeFi developments and risks in the EU shows that DeFi raises serious risks to investor protection, because of the highly speculative nature of many DeFi arrangements and important operational and security vulnerabilities. Risks to financial stability are not meaningful at this point owing to DeFis small size but require monitoring. In addition, DeFis unique features have led to new market manipulation issues that need to be addressed.

DeFi has seen significant development over the last few years, although it remains very small in size (the Total Value Locked in DeFi protocols reached USD45bn as of end-June 2023 representing less than 4% of the total crypto-assets market capitalisation), and has garnered attention from consumers, but also from global regulators because of the risks it raises.

The article introduces a methodology for the categorisation of smart contracts which leverages on the latters source code and on topic modelling. It explores the rate of deployment of smart contracts belonging to the identified categories over time, contributing to an enhanced and nuanced understanding of DeFi,and also to identifying related significant risks.

ESMA defines five major smart contract categories and monitors their relative incidence over time. It notes a significant difference in terms of heterogeneity between the first and the second surge in smart contract deployment (occurring in 2017 2018 and in 2021 2023, respectively), reflecting the adoption of increasingly complex and interdependent protocols that have come to characterise DeFi.

ESMA is organising a public webinar on the findings of these articles. During the webinar, the authors of the articles and OECD representative will deliver a presentation, followed by a Q&A session.

The webinar will be held online on Wednesday, 25 October 2023 from 11:00 to 12:00.

Interested persons are welcome to register by Monday, 23 October 2023 at 12:00 via this link.

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ESMA assesses market developments in DeFi and explores the ... - ESMA