How Do Decentralized Finance Protocols Compare to Traditional Financial Products? A Taxonomic Approach

Abstract

This paper creates a new taxonomy of Decentralized Finance (DeFi) protocols following the methodology specifically tailored to information systems set out by Nickerson et al. (2013). This taxonomy provides a tool to classify DeFi protocols, allowing for a structured comparison with traditional financial mechanisms in the present-day (as included in this paper), as well as providing a repeatable procedure in order to track development of the space in the future. Further, the clustering of classified protocols facilitates the rapid identification of similar protocols beyond the mere identification of functions. The dimensions and characteristics of the taxonomy are discussed, as well as qualitative observations concerning the current DeFi landscape. Comparisons with traditional financial mechanisms highlight not only instances of one-to-one replacement of centralized instruments with decentralized alternatives, but also new innovations and products better suited to DeFi environments. Risks and opportunities around these inventions are also discussed.