Decentralized Finance: Applications, Risk and Regulational Implications

Abstract

Blockchain and its applications have been increasingly familiar to market participants, investors, and developers in the last 5 years. Technology developments and increasing usage of smart devices create a booming environment for blockchain applications, including Decentralized Finance (DeFi) applications. DeFi applications are designed and developed from blockchain technology and decentralized protocols, having the potentials to replace the traditional financial system and applications such as deposits, lending, exchange and derivatives. In this study, we provide detailed comparisions between traditional centralized finance and decentralized finance, which highlight the anonymity, transparency, universal assess and interoperable and composable of DeFi protocols. Moreover, we examine popular DeFi applications in lending, exchange and derivatives, that are expectedly promote financial inclusion and improve social efficiency with the public, security, and anonymity in financial services. Consequently, we discuass the benefits, risks and challenges with which these DeFi applications posing to the authorities and provide some policy implications.