The emerging world of decentralized finance (DeFi), facilitated by smart contracts operating on blockchain networks, has been notable both for its rapid growth and the high-profile collapses of several of its largest participants. In this paper, we provide a technical account of the financial mechanisms which facilitated the growth and eventual collapse of the Terra Network. From this analysis, we outline a generalizable economic theory of blockchains which aims to differentiate the economics of blockchains as programmable environments from blockchains as accounting ledgers for crypto-assets. This adds to the existing literature on crypto-assets, which largely focuses on the financial characteristics of the crypto-assets themselves rather than their underlying blockchains. We argue that DeFi is structured so as to offer consumers distinct blockchain networks as competing choices differentiated by several key characteristics. We test several implications of this theory using Terra's collapse as a natural experiment, finding evidence that bridges between programmable blockchain networks create increased risk of spillover effects to other blockchains' programmable environments in the wake of a major shock event like Terra's collapse. Specifically, blockchains suffered a time-bound loss of market share and the likelihood of this loss grew approximately 40% for each additional bridge that was deployed in common with Terra at the time of Terra’s collapse.
<p><big>Cryptocurrencies have gained popularity over the past five to six years. Most recently, events like the FTX bankruptcy fueled the interest in regulation. Moreover, it is possible that the FTX event disrupting the cryptocurrency market was a factor in Silicon Valley Bank&#39;s failure. While several countries consider regulation, from soft regulation, like Japan, to more rigid standards, like the total ban in China, we study the effect of other news or events on cryptocurrency prices. This paper looks at historical closing prices for Bitcoin, the largest of the cryptocurrencies, and how prices react to various events. Then we focus on modeling the time series considering an &#39;event,&#39; China&#39;s ban on cryptocurrency exchanges, using intervention analysis. We find that intervention analysis provides a reliable approach to quantifying the impact regulation may have on cryptocurrency pricing.</big></p>
The Intersection of Cryptocurrency and Securities Law has been discussed in various legal contexts in the present scenario. The rise of cryptocurrencies has put forth fresh challenges for investors as well as regulators and there is a need for clear direction on how to interpret the transactions that include digital currencies. The advent of crypto exchanges has formed an entire ecosystem of services and participants, who are looking to provide liquidity, exploit price differences for profit, and support the investments. The focus of the study is to investigate the legal and regulatory steps taken to include cryptocurrencies within securities law. The paper will delve into the distinctive attributes of cryptocurrencies and analyse the different regulations in which they can be classified as securities. Moreover, it will inspect the fluctuating regulatory strategies adopted by various countries and entities, such as the United States Securities and Exchange Commission (SEC), United Kingdom’s Financial Conduct Authority (FCA), The Australian Securities and Investments Commission (SIC), Securities and Exchange Board of India (SEBI) and others.
The rise of intermediary-less decentralized finance (“DeFi”) lending has led many to wonder how it should be regulated. Although DeFi lending could potentially offer reduced risks of centralization and market frictions, investors in DeFi lending are currently exposed to centralized risks and losses in the volatile market in the absence of regulation. The SEC suggested that the agency might regulate the sector under the federal securities laws. A truly decentralized lending project, however, does not involve any centralized entity that could carry the burden of compliance with the securities laws. This Note shows that many DeFi lending projects are not truly decentralized and are in various stages of decentralization. Unlike P2P lenders and financial intermediaries that bear the costs of compliance, many DeFi developers seek to build automated lending systems and gradually relinquish their control over their creation. However, with the lack of regulation, the investors have no means to tell actors who seek to build secure decentralized systems from those who do not in the early stage of DeFi protocol development. To address the issue, this Note proposes a three-part framework that would oversee the process of decentralization for DeFi lending projects, drawing its structure from the U.S. banking regulation focused on supervision. First, the framework recognizes the value of decentralization in reducing market frictions and risks of centralization. Second, the framework establishes a federal agency that oversees the process of decentralization on the flexible safety and soundness standard of Glass-Steagall Act. Third, the framework grants enforcement powers to the federal agency to sanction DeFi platforms that do not comply with government regulations.
Rubén Leal Buenfil, Alexander Hernandez Romanowski
In order to make public policy recommendations to efficiently regulate Decentralized Finance (DeFi), we conducted an exploratory study examining the state of the art, organizing the public debate and analyzing real-world applications of this cutting-edge technology.We found that DeFi has the potential to increase efficiency in financial markets, promote competition, improve access to capital and contribute to economic growth.For all its potential benefits, however, the technology also presents substantial challenges in the form of user accessibility, market stability, fair competition and law enforcement.Growth of the emerging DeFi market depends on successfully addressing the concerns of investors, consumers and authorities without simultaneously regulating the technology into inefficiency and disuse.Taking into account the implications of DeFi for antitrust policies and economic growth, we explore the applicability of a balanced embedded-regulation, which holds promise as a bridge between innovation and regulation.The main limitation of this study is related to the constantly-evolving nature of DeFi technology.Recommendations for its regulation may vary as new evidence becomes available, but this document may pave the way for further research.
Sarah Azouvi, Guy Goren, Lioba Heimbach, Alexander Hicks
In 2021 Ethereum adjusted the transaction pricing mechanism by implementing EIP-1559, which introduces the base fee - a network fee that is burned and dynamically adjusts to the network demand. The authors of the Ethereum Improvement Proposal (EIP) noted that a miner with more than 50% of the mining power could be incentivized to deviate from the honest mining strategy. Instead, such a miner could propose a series of empty blocks to artificially lower demand and increase her future rewards. In this paper, we generalize this attack and show that under rational player behavior, deviating from the honest strategy can be profitable for a miner with less than 50% of the mining power. We show that even when miners do not collaborate, it is at times rational for smaller miners to join the attack. Finally, we propose a mitigation to address the identified vulnerability.
The world financial crisis of the late 2000s was for some the dawn of a new era in which state currency monopolies would be replaced by privately-issued digital currencies following strict rules of supply growth. Rather than trust big government and big banks with our money, cryptocurrencies would allow us to “trust the code” and the “mathematical structure” of blockchain technologies.In Brazil, as elsewhere, this neoliberal techno-utopia has not arisen. Though their use as speculative assets has increased, cryptocurrencies have not become a popular means of payment. The use of electronic money, on the other hand, issued by novel corporate entities called payment institutions, is now commonplace. Unlike cryptocurrencies, digital banking and electronic money in Brazil rest on a solid legal and institutional framework designed to incorporate them into the payments system. Digital banks enjoy most of the privileges bestowed upon traditional banks, making it possible for customers to use digital accounts in the same manner as a traditional checking account. In short, digital banks have become privileged members of Brazil’s state-led “pay community” and this is why they have flourished. Even in the digital era, money is a creature of the state.
Mohammad A. AlAhmad, Adel Alfouderi, Ahmad Alonaizi, Meshal Aldhamen
Bitcoin has had a tremendous impact on the monetary system around the globe today since its launch in 2009 by its founder, Satoshi Nakamoto. Since then, over three thousand cryptocurrencies have risen to compete with traditional fiat currencies. While many experts believe that cryptocurrencies are more comparable to assets like gold, few others believe that cryptocurrencies could replace traditional fiat currencies as a medium of payment, just as Satoshi envisioned when he published the Bitcoin protocol. As such, there exist few papers in the literature discussing the potential for Bitcoin to become a major payment currency. Nevertheless, there is a lack of research in evaluating whether Bitcoin is set to dominate the market as a payment currency, or whether another cryptocurrency would take the lead. In addition, the issue of strict regulation capping the potential of cryptocurrencies has been well-studied in the literature and, hence, this paper tries to evaluate the top five leading cryptocurrencies (based on their market cap value as of July 2020) from a different perspective. Particularly, the evaluation is based on five benchmark evaluation factors: Speed, Activity, Decentralization, Users, and Community. For this preliminary study, we assign all these benchmarks an equal weight. Our conclusion shows that Ethereum could be more suitable as a future payment currency rather than Bitcoin.
Emerging technologies are revolutionizing the banking and financial services industry, with innovations such as blockchain, artificial intelligence, machine learning, cloud computing, and FinTech solutions reshaping financial transactions, security, and risk management. These advancements improve operational efficiency, reduce costs, and enhance customer experience. However, they also introduce challenges, including regulatory compliance, cybersecurity risks, and increased financial instability due to rapid technological shifts. Blockchain has the potential to increase transparency and security in financial transactions, while AI and machine learning optimize credit scoring, fraud detection, and personalized financial services. The integration of quantum computing, augmented reality, and decentralized finance (DeFi) presents further opportunities for financial transformation. Despite these benefits, financial institutions must balance innovation with regulatory and ethical concerns. This study explores the role of emerging technologies in reshaping banking, emphasizing their potential benefits and limitations. Strategic collaboration between traditional banks and FinTech companies is crucial for sustainable financial growth.
Mikel Cortes-Goicoechea, Tarun Mohandas-Daryanani, José L. Muñoz, Leonardo Bautista-Gomez
Like most modern blockchain networks, Ethereum has relied on economic incentives to promote honest participation in the chain's consensus. The distributed character of the platform, together with the “randomness” or “luck” factor that both proof of work (PoW) and proof of stake (PoS) provide when electing the next block proposer, pushed the industry to model and improve the reward system of the system. With several improvements to predict PoW block proposal rewards and to maximize the extractable rewards of the same ones, the ultimate Ethereum's transition to PoS applied in the Paris Hard-Fork, more generally known as “The Merge”, has meant a significant modification on the reward system in the platform. In this paper, we aim to break down both theoretically and empirically the new reward system in this post-merge era. We present a highly detailed description of the different rewards and their share among validators' rewards. Ultimately, we offer a study that uses the presented reward model to analyze the performance of the network during this transition.
Double-entry accounting has been used globally for the past six hundred years and has become the base for all corporate financial reporting. Blockchain technology with distributed ledger now provides a new method of accounting termed “triple-entry accounting”. This method consists of recording and storage of business transactions, as a third entry on the blockchain. This third entry is expected to deliver a system that is trustworthy, immutable, and transparent. This study conducts a detailed review of the present literature on triple-entry accounting with blockchain technology and its impact on fraudulent practices. The review shows current literature has limited information on how this methodology will deter financial and accounting fraud. Drawing on the case studies of twenty-four companies involved in fraudulent practices globally, this paper describes common practices in manipulating financial statements, falsifying accounting records, and fraudulent banking transactions. The study explains the mechanics of how these practices can be prevented using triple-entry accounting in the blockchain environment and how the technique will bring about changes in the audit process and in the roles of internal and external auditors in the organization. The study recommends research propositions focused on governance and financial performance of a company when this method is adopted.
The world has for a long time adopted a financial system where risk control is placed in the care of central authorities or intermediaries. People who invest in the current financial system relinquish their assets to intermediaries such as a bank, stock exchanges, mutual fund companies, insurance companies, and brokers. Many problems have arisen, casting doubt on the effectiveness of the current financial system. An innovative system that introduces the prospects of removing banks’ and other institutions’ control over money, financial products, and financial services is emerging – decentralized finance (DeFi). An extensive study on the subject was done, focusing on the viability of decentralized finance to replace the role of traditional financial systems, using recently published reports. Decentralized finance, a financial ecosystem built on blockchain technologies, is geared toward disrupting the traditional finance world. The features of DeFi promise to revolutionize various financial transactions including DeFi lending and borrowing, decentralized insurance, and decentralized exchanges. DeFi strives to allow direct financial transactions between users, minus the controls of any single entity. Being relatively new, even with all the opportunities it offers, DeFi may have a higher level of risk due to difficulties with regulation, infrastructural mishaps, and potential hacks and scams. Despite the hype around DeFi, it is prudent to understand not only the rewards but also the risks. Decentralized finance is in its early stages of evolution. As we move forward, many issues must be addressed and advancements made before DeFi becomes safe to use.
This paper examines the historical development and cross-sectional heterogeneities of Financial Market Infrastructure (FMI). From an evolutionary perspective, we review and compare FMIs in the US, Europe, and China. We identify an emerging trend in which the development of FMI is transitioning from digitalization to tokenization with the rise of Distributed Ledger Technology (DLT). Digitalization reinforces centralization, while tokenization promotes decentralization, posing complex challenges to regulatory framework which is also part of FMI. We then specifically analyze DLT-based FMI in the bond market, evaluate different models of tokenization, and propose a heterogeneous consortium blockchain solution.
Carlos Alberto Durigan, Fernando José Barbin Laurindo
Cryptocurrency can be understood as a digital asset transacted among participants in the crypto economy. Every cryptocurrency must have an associated Blockchain. Blockchain is a Distributed Ledger Technology (DLT) which supports cryptocurrencies, this may be considered as the most promising disruptive technology in the industry 4.0 context. Decentralized finance (DeFi) is a Blockchain-based financial infrastructure, the term generally refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum Blockchain. It replicates existing financial services in a more open and transparent way. DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocols and decentralized applications (Dapps). Considering that there are many digital coins, stablecoins and central bank digital currencies (CBDCs), these currencies should interact among each other sometime. For this interaction the Information Technology elements play an important whole as enablers and IT strategic alignment. This paper considers the strategic alignment model proposed by Henderson and Venkatraman (1993) and Luftman (1996). This paper seeks to answer two main questions 1) What are the common IT elements in the DeFi? And 2) How the elements connect to the IT strategic alignment in DeFi? Through a Systematic Literature Review (SLR). Results point out that there are many IT elements already mentioned by literature, however there is a lack in the literature about the connection between IT elements and IT strategic alignment in a Decentralized Finance (DeFi) architectural network. After final considerations, limitations and future research agenda are presented. Keywords: IT Strategic alignment, Decentralized Finance (DeFi), Cryptocurrency, Digital Economy.
In traditional finance, the Black & Scholes model has guided almost 50 years of derivatives pricing, defining a standard to model any volatility-based product. With the rise of Decentralized Finance (DeFi) and constant product Automated Market Makers (AMMs), Liquidity Providers (LPs) are playing an increasingly important role in markets functioning, but, as the recent bear market highlighted, they are exposed to important risks such as Impermanent Loss (IL). In this paper, we tailor the formulas introduced by Black & Scholes to DeFi, proposing a method to calculate the greeks of an LP. We also introduce Impermanent Gain, a product that LPs can use to hedge their position and traders can use to bet on a rise in volatility and benefit from large market moves.
This paper investigates the causes and the consequences of the FTX digital currency exchange’s failure in November 2022. Analysing on-chain data, we report that FTX heavily relied on leveraging and misusing its native token, FTT, and we show how this behaviour exacerbated the company’s fragile financial situation. To gain further insights into the downfall, we employ state-of-the-art network science instruments to model the evolutionary dependency structures of 199 cryptocurrencies on an hourly basis, and we investigate tick-by-tick public trades at the time of the events. We identify the collapse of the Terra-Luna ecosystem as the pivotal event that triggered a significant decrease in the exchange’s liquidity. Results suggest that the crash was actively accelerated by Binance tweets causing a systemic reaction in the cryptocurrency market. Finally, identifying the actors who mostly benefited from the FTX’s collapse and highlighting a generalised trend toward centralisation in the crypto space, we emphasise the importance of genuinely decentralised finance for a transparent, future digital economy.
Jiahua Xu, Yebo Feng, D. H. Cámpora Pérez, Benjamin Livshits
Decentralized finance (DeFi) is an integral component of the blockchain ecosystem, enabling a range of financial activities through smart-contract-based protocols. Traditional DeFi governance typically involves manual parameter adjustments by protocol teams or token holder votes, and is thus prone to human bias and financial risks, undermining the system's integrity and security. While existing efforts aim to establish more adaptive parameter adjustment schemes, there remains a need for a governance model that is both more efficient and resilient to significant market manipulations. In this paper, we introduce "Auto$.$gov", a learning-based governance framework that employs a deep Qnetwork (DQN) reinforcement learning (RL) strategy to perform semi-automated, data-driven parameter adjustments. We create a DeFi environment with an encoded action-state space akin to the Aave lending protocol for simulation and testing purposes, where Auto$.$gov has demonstrated the capability to retain funds that would have otherwise been lost to price oracle attacks. In tests with real-world data, Auto$.$gov outperforms the benchmark approaches by at least 14% and the static baseline model by tenfold, in terms of the preset performance metric--protocol profitability. Overall, the comprehensive evaluations confirm that Auto$.$gov is more efficient and effective than traditional governance methods, thereby enhancing the security, profitability, and ultimately, the sustainability of DeFi protocols.
Abstract In recent years, the use of cryptocurrencies has increased. As these currencies continue to play a larger role, they eventually will be an important component of banking system activity. Moreover, in addition to the standard role of financial intermediaries to facilitate lending, intermediaries can be valuable firms that help provide safekeeping of tokens. The objective of this paper is to demonstrate these important functions in a microfounded model of monetary exchange. Furthermore, we also consider the possibility that central banks issue their own digital currencies that may affect the level of intermediation in the private banking system.
Liquidations in Decentralized Finance (DeFi) are both a blessing and a curse -- whereas liquidations prevent lenders from capital loss, they simultaneously lead to liquidation spirals and system-wide failures. Since most lending and borrowing protocols assume liquidations are indispensable, there is an increased interest in alternative constructions that prevent immediate systemic-failure under uncertain circumstances. In this work, we introduce reversible call options, a novel financial primitive that enables the seller of a call option to terminate it before maturity. We apply reversible call options to lending in DeFi and devise Miqado, a protocol for lending platforms to replace the liquidation mechanisms. To the best of our knowledge, Miqado is the first protocol that actively mitigates liquidations to reduce the risk of liquidation spirals. Instead of selling collateral, Miqado incentivizes external entities, so-called supporters, to top-up a borrowing position and grant the borrower additional time to rescue the debt. Our simulation shows that Miqado reduces the amount of liquidated collateral by 89.82% in a worst-case scenario.
Son yıllarda riskleri ve getirileri ile dikkat çeken yüksek oynaklık içeren kripto piyasasında, kripto paraların birbirleri ile olan etkileşimi yatırımcıların portföy kararları için önemli unsur olmuştur. Kripto paralar, yatırım portföyünde bir çeşitlendirme aracı ya da alternatif yatırımlara karşı hedge unsuru olarak görülmüştür. Bu makalede Bitcoin, Binance, Cardano, Dogecoin, Ripple, Ethereum ve IOTA para birimlerinin haftalık kapanış fiyatlarını içeren 231 gözlem kullanılarak, kripto paraların kendi aralarındaki doğrusal olmayan dinamik ilişkiler araştırılmıştır. Bu amaçla, kriptolar arasında doğrusal olmayan uzun dönemli ilişkiler ve nedensel ilişkiler sorgulanmıştır. Çoğu kripto paranın birbirleri ile yüksek ve pozitif korelasyona sahip olduğu tespit edilmiştir. Ekonometrik bulgular, Bitcoin ile Ethereum arasında uzun dönemli ilişkinin ve Bitcoin ile diğer para birimleri arasında karşılıklı etkileşimin olduğu yönündedir. Bulgular, kripto para piyasasının yüksek oynaklık içerdiği dönemlerde, yatırımcıların kripto para birimleri arasında riskten korunmada zorluk yaşayabileceği anlamına taşımaktadır. Diğer bir ifadeyle, kripto para piyasasının kendi içindeki çeşitlendirme çabasının yatırımcılara getireceği faydasının sınırlı kalacağı da bu çalışmanın diğer bir bulgusudur.
Emircan YILDIRIM, Kerim Eser AFŞAR, Ramazan Bektaş
Bitcoin ile başlayan kripto para ekosistemi ve büyük teknoloji şirketlerinin kendi ödeme sistemlerini kurma girişimleri, merkez bankalarının para üzerindeki tekel haklarını tehdit etmeye başlamıştır. Merkez bankalarının bu gelişmelere olan nihai tepkisi merkez bankası dijital parasıdır (CBDC). Bu çalışmada blok zinciri ağlarında kullanılan alternatif protokol mekanizmalarının, verimlilik, güvenlik ve mahremiyet bağlamında karşılaştırması CBDC literatürünü kapsayacak şekilde yapılmıştır. Çalışmanın amacı protokol ve tasarım özelliklerinin “yeni finansal mimari” içindeki işlevini analiz etmektir. Bu bağlamda çalışmada, CBDC tasarımında bahsi geçen protokollerin işleyişini ayrıntılandırıyoruz. Araştırma kapsamında blok zinciri teknolojisi uzmanlarıyla yarı yapılandırılmış mülakat tekniği kullanılarak veriler toplanmış ve karşılaştırmalı analize tabi tutulmuştur. Karşılaştırmalı analiz yöntemiyle elde edilen bulgulara göre CBDC tasarımında Proof of Authority (POA) protokolünün kullanılması, merkez bankalarına finansal sistemin tümü bağlamında bir gözetim yapabilme şansı tanıyarak bireysel mahremiyeti tamamen ortadan kaldırabilir. Çevrim dışı ödeme (OPS) protokolünün kullanılmadığı durumlarda CBDC’nin amaçlarından biri olan finansal kapsayıcılık işlevsiz kalabilir. Proof of Work (PoW) ve Proof of Stake (PoS) protokollerinin varyasyonlarının kullanılması ise ölçekleme probleminin ortaya çıkmasına neden olabilir. CBDC tasarımlarında kullanılan protokollerin güçlü yönleri dikkate alınarak hibrit bir protokol oluşturulabilir. Protokol yapısının güçlü olması para politikası bağlamında CBDC’nin işlevselliğini arttırabilir. CBDC protokolleri literatürde çoğunlukla verimlilik ve güvenlik boyutlarıyla tartışılmaktadır. Tartışmaya mahremiyet boyutunun da dâhil edilmesi gerektiğini iddia ediyoruz.
A technology that was developed eight years ago is cryptocurrency, which is an encrypted, peer-to-peer network for facilitating digital barter. The first and most widely used cryptocurrency, Bitcoin, is paving the way as a disruptive technology for decades-old financial payment systems that have remained unchanged. Although cryptocurrencies are unlikely to replace conventional fiat currency, they have the potential to alter how Internet-connected global markets interact with one another, removing barriers to exchange rates and standard national currencies. The market in which a technology aims to improve is almost entirely responsible for its success. Technology advances at a rapid rate. By creating a fee-free trading system, cryptocurrencies may revolutionize digital trade markets. A SWOT analysis of Bitcoin is provided, which sheds light on some of the most recent happenings and trends that may have an impact on whether or not Bitcoin contributes to a paradigm shift in the economic system.
<strong>In recent years, the quick development of blockchain technology and cryptocurrencies had an impact on the financial industry by creating a new crypto economy. The upcoming generation of decentralized applications has appeared due to smart contracts. DEX’s provide many advantages in comparison to centralized exchanges. However, they also bring several security risks. In this paper the focus is on the impact of security risks on the trust in decentralized finance(DeFi) and DEX’s, and how security risks and trust impact DeFi adoption. This research discusses several security risks and conducts an empirical study(surveys) to measure the trust in DEX’s and DeFi. Additionally, secondary data is researched to form the empirical study and to better understand the research subjects. The results are that the security risks negatively impact the trust in DEX’s which negatively affects the adoption of DeFi.</strong>
The paper takes a close look at an emerging industry - decentralized finance on the blockchain. The goal of this paper is to compare centralized order book (CLOB)-based exchanges to automated market maker (AMM)-based decentralized exchanges (DEX) and analyze the challenges that AMM-based DEXes are facing today using Uniswap as an example.