The Art of Asking and Borrowing in Decentralized Finance (Houhai Chen

Abstract

Imagine being able to lend and earn interest without ever having to talk to a bank. That's the vision of Decentralized Finance (DeFi), a fast-growing area of finance that is built on blockchain and smart contracts. This paper discusses how lending sites like Aave, Compound, and MakerDAO work, and why clients from ordinary savers looking for high returns to institutions seeking clout are joining. We delve into the technology behind smart contracts, how they deal with risk using over-collateralization, and what motivates people to lend or borrow under this trustless system. But DeFi is not just a tech story-it's social too. It has the potential to disrupt traditional finance, open up access in underserved communities, and put a strain on global regulatory systems. But challenges of scalability, security, and restricting usage to crypto holders only also raise underlying questions. Drawing on a mix of on-chain data and user case studies, this paper further applies resilience theory to discover how DeFi responds to economic shocks compared to traditional banks. By doing so, it fills a key research gap in terms of the long-term economic contribution of DeFi. We offer policy proposals like undercollateralized lending programs and single point regulation, and argue that DeFi, if carefully constructed, can support goals like decent work and economic growth (UN SDG 8). There needs to be future work on what drives take-up and how DeFi could scale across blockchains and geographies to realize its potential.