Decentralized Finance (DeFi): Transformative Potential &amp; Associated Risks

Carapella, Francesca; Dumas, Edward J.; Gerszten, Jacob; Swem, Nathan; Wall, Larry D.

doi:10.17016/feds.2022.057

Cited by 17 publications

(13 citation statements)

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“…TradFi institutions are exploring blockchain integration to improve their operations and consider offering financial products and services in the cryptocurrency space. However, TradFi approaches the crypto market cautiously, prioritizing areas such as payment systems and gradually incorporating blockchain technology in banks and financial services [18,19].…”

Section: Traditional Finance (Tradfi)mentioning

confidence: 99%

A Review on Decentralized Finance Ecosystems

Alamsyah,

Kusuma,

Ramadhani

2024

Future Internet

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The future of the internet is moving toward decentralization, with decentralized networks and blockchain technology playing essential roles in different sectors. Decentralized networks offer equality, accessibility, and security at a societal level, while blockchain technology guarantees security, authentication, and openness. Integrating blockchain technology with decentralized characteristics has become increasingly significant in finance; we call this “decentralized finance” (DeFi). As of January 2023, the DeFi crypto market capitalized USD 46.21 billion and served over 6.6 million users. As DeFi continues to outperform traditional finance (TradFi), it provides reduced fees, increased inclusivity, faster transactions, enhanced security, and improved accessibility, transparency, and programmability; it also eliminates intermediaries. For end users, DeFi presents asset custody options, peer-to-peer transactions, programmable control features, and innovative financial solutions. Despite its rapid growth in recent years, there is limited comprehensive research on mapping DeFi’s benefits and risks alongside its role as an enabling technology within the financial services sector. This research addresses these gaps by developing a DeFi classification system, organizing information, and clarifying connections among its various aspects. The research goal is to improve the understanding of DeFi in both academic and industrial circles to promote comprehension of DeFi taxonomy. This well-organized DeFi taxonomy aids experts, regulators, and decision-makers in making informed and strategic decisions, thereby fostering responsible integration into TradFi for effective risk management. This study enhances DeFi security by providing users with clear guidance on existing mechanisms and risks in DeFi, reducing susceptibility to misinformation, and promoting secure participation. Additionally, it offers an overview of DeFi’s role in shaping the future of the internet.

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Section: Traditional Finance (Tradfi)mentioning

confidence: 99%

A Review on Decentralized Finance Ecosystems

Alamsyah,

Kusuma,

Ramadhani

2024

Future Internet

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“…In (Carapella et al 2022), the authors provide an overview of blockchain basics and the major DeFi protocols and products they offer, together with the mechanisms for repayment of smart contracts, and finally they cover potential risks associated with these technologies and use cases. In (Gudgeon et al 2020), the authors conduct an empirical analysis to observe the behavior of interest rate rules since their introduction, focusing on their responses to various levels of liquidity.…”

Section: Event: Repayment Of Loans By Lssmentioning

confidence: 99%

Simulation of Dynamic Performance of DeFi Protocol Based on Historical Crypto Market Behavior

Grigorova,

Karamfilov,

Merakov

et al. 2023

Risks

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In a rapidly evolving and often volatile crypto market, the ability to use historical data for simulations provides a more realistic assessment of how decentralized finance (DeFi) protocols might perform. This insight is crucial for participants, developers, and investors seeking to make informed decisions. This paper presents a comprehensive study evaluating the dynamic performance of a newly developed DeFi protocol—NOLUS. The main objective of this paper is to present and analyze the built realistic model of the platform. This model could be successfully used to analyze the stability of the platform under different environmental influences by performing various simulations and conducting experiments with different parameters that could not be realized with the real platform. In the article, the key components of the platform are presented in detail and the main dependencies between them are clarified, in addition to the ways of forming multiple variables, and the complex relations between them in the real protocol are explained. The main finding from the experimental part of the study is that the performance of the protocol representation accounts for the expected system behavior. Hence the system simulation could be successfully used to reveal essential protocol behaviors resulting from potential shifts in the crypto market environment and to optimize the protocol’s hyper parameters.

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“…DeFi can replicate most traditional financial systems, such as trading platforms and borrowing and lending marketplaces, and the rapid growth of DeFi brings forward both opportunities and challenges. For more details of DeFi and its potential risks, we refer readers to Werner et al (2021), Makarov andSchoar (2022), andCarapella et al (2022).…”

Section: Decentralized Finance (Defi) and Decentralized Autonomous Or...mentioning

confidence: 99%

“…Though DAO-governed DeFi seems more decentralized than traditional financial institutions, tricky problems still exist. For example, on-chain illegal activities may have negative externality, and in some cases, illiquidity can occur in DeFi (Carapella et al, 2022;Qin et al, 2021;Foley, Karlsen and Putniņš, 2019). Therefore, DAO governance is crucial for both the use cases and reliability of DeFi.…”

Section: Introductionmentioning

confidence: 99%