Since the Merge update upon which Ethereum transitioned to Proof of Stake, it has been touted that it resulted in lower power consumption and increased security. However, even if that is the case, can this state be sustained? In this paper, we focus on the potential impact of competition with other smart contract platforms on the price of Ethereum's native currency, Ether (ETH), thereby raising questions about the safety and sustainability purportedly brought about by the design of Proof of Stake.
As one of the most popular blockchain platforms supporting smart contracts, Ethereum has caught the interest of both investors and criminals. Differently from traditional financial scenarios, executing Know Your Customer verification on Ethereum is rather difficult due to the pseudonymous nature of the blockchain. Fortunately, as the transaction records stored in the Ethereum blockchain are publicly accessible, we can understand the behavior of accounts or detect illicit activities via transaction mining. Existing risk control techniques have primarily been developed from the perspectives of de-anonymizing address clustering and illicit account classification. However, these techniques cannot be used to ascertain the potential risks for all accounts and are limited by specific heuristic strategies or insufficient label information. These constraints motivate us to seek an effective rating method for quantifying the spread of risk in a transaction network. To the best of our knowledge, we are the first to address the problem of account risk rating on Ethereum by proposing a novel model called RiskProp, which includes a de-anonymous score to measure transaction anonymity and a network propagation mechanism to formulate the relationships between accounts and transactions. We demonstrate the effectiveness of RiskProp in overcoming the limitations of existing models by conducting experiments on real-world datasets from Ethereum. Through case studies on the detected high-risk accounts, we demonstrate that the risk assessment by RiskProp can be used to provide warnings for investors and protect them from possible financial losses, and the superior performance of risk score-based account classification experiments further verifies the effectiveness of our rating method.
Decentralized finance (DeFi) transactions are typically executed using a special digital class of contracts called smart contracts. These contracts are self-executing and hardcoded directly on a blockchain. We observe the emergence of a new class of voluntary audits that evaluate the integrity of these contracts. Using a hand-coded sample of about 8,500 smart contract audit reports, we provide some of the first evidence showing that (1) these audits are pervasive, (2) the audit firm market is predominantly composed of new technical audit firms, (3) the scope of these audits can span a variety of contract features, (4) the audit inputs and outputs differ substantively from those of conventional financial audits, and (5) the market reacts positively to the release of these audit reports, suggesting that these reports are value-relevant. These findings highlight the demand for novel assurance services driven by blockchain technology.
Decentralized Finance (DeFi) is gaining momentum in India, showcasing both the current state and future potential of this transformative financial ecosystem. In terms of the current state, several DeFi projects and initiatives have emerged, aiming to address financial inclusion and streamline traditional financial processes. These projects include decentralized lending platforms, decentralized exchanges, and yield farming protocols. While the adoption of DeFi is still in its early stages in India, there is a growing interest among individuals and institutions to explore the possibilities offered by this technology. Looking ahead, the future potential of DeFi in India is immense. With a large unbanked and underbanked population, DeFi can bridge the gap by providing access to financial services, such as loans, savings, and investments, directly to individuals without the need for intermediaries. Additionally, DeFi can empower small businesses and startups by enabling peer-to-peer lending and innovative fundraising models.
Sakib Mahmud, Tahmid Wahid, A.N.M. M. H. Chowdhury, Mahaboba Jesmine Ekra
Decentralized finance (DeFi) has emerged as a credible challenger in the financial industry's current norms. It employs cutting-edge solutions to decentralize banking and industry concepts and provide financial services to anybody, everywhere. It also intends to improve financial inclusion by transforming lending and borrowing. However, no study has thoroughly demonstrated how DeFi is upsetting the whole financial system, or how the system as a whole may adjust to this unavoidable evolutionary condition. We attempted to summarize the situation by evaluating some critical documents, including quality working papers, opinion articles, reports, and research papers. Our findings suggest that DeFi could effectively replace banks which function as a middleman for all transactions, if the traditional system of banking is not changed, If people do not deposit their money at banks, banks may be wiped out. To deal with the system, central banks are using CBDC (Central Bank Digital Currency), which is supposed to make monetary policy more effective. The CBDC, which is account-based and bears interest, can serve as a store of value, medium of exchange, and stable unit of account. Although, CBDC can reduce the deposits, and market share of small banks. Overall, this manuscript hopes to give insight to researchers, policy-makers, bankers, and finance practitioners to understand the disruption effectively and take necessary adapting policies.
In response to new developments in financial structure and technology, and galvanized by recent eruptions of volatility, officials from Washington to London to Brussels are grappling with how to regulate the cluster of practices known as decentralized finance, or DeFi. This is a political as well as an economic question. This is to say, the outcome will involve interests in addition to considerations of efficiency. Although advocates of decentralized finance often invoke laudable goals like reduced costs and increased inclusion, it is worth examining what else rides those coattails.
We explore the role of auditor reputation in driving the value of smart contract audits (SCAs) within the decentralized finance (DeFi) ecosystem. Given the lack of regulatory oversight and the risk of cybersecurity breaches against the protocols comprising the DeFi ecosystem, a marketplace has emerged for voluntary on-demand assurance to identify vulnerabilities in smart contracts’ coded logic. After documenting that market participants value SCAs and exploring the protocol attributes associated with the demand for smart contract audits, we show that auditor reputation can be established through both advertising (i.e., engagement on Twitter) and the delivery of a high-quality audit, which significantly shape the extent to which an SCA is valued. Additional analyses suggest that the value of an SCA is maximized when both high advertising and high audit quality are present, highlighting the complementary role of these two factors in enhancing auditor reputation. Furthermore, we find that events conceivably damaging the reputation of the auditor (i.e., breaches of protocols recently audited) generate a negative spillover to the auditor’s other recent clients. Overall, our study provides novel insights about the role of auditor reputation in emerging audit markets.
Decentralized Finance (DeFi), a blockchain-based form of alternative financial markets, has been the focus of public attention in recent months. Even though DeFi has a young history, its smart contract ecosystem already offers multiple opportunities for the design and transfer of crypto assets, establishing market structures comparable to traditional financial markets. The landscape of DeFi projects also increasingly includes insurance protocols offering complex risk transfer mechanisms for hedging DeFi risks, above all smart contract risks. In principle, the projects offer the same value proposition as traditional insurance: risk minimization and transfer, and thus an increase in income predictability through the payment of a premium. At the same time, most of those risk transfer protocols are highly dependent on subjective expectations and decentralized governance structures. This article depicts a first taxonomical understanding of DeFi insurance, demarcates DeFi cover products from well-known insurance concepts, and provides an initial assessment of smart contract risk insurability and commercial opportunities for traditional insurers.
Amit Chaudhary, Roman Kozhan, Ganesh Viswanath-Natraj
This paper studies determinants of interest rates on Decentralized lending protocols. Using transaction level data, we show these protocols are being used to make long or short leveraged positions in the cryptocurrency market. We identify a significant relationship between the interest rate differential and the perpetual futures premium for the ETH/USDT market. However, the link is economically weak, indicating that the speculative beliefs in the two markets are only weakly correlated and that the markets are segmented. Arbitrage across the two markets is ineffective due to wide no-arbitrage bounds, which are governed by high trading costs, gas fees, and price impacts.
The decentralized finance (DeFi) industry hosts billions of dollars in cryptocurrency deposits across protocols that autonomously and independently execute financial transactions. However, little is known about how these protocols raise capital or conduct their governance. This paper examines the token distribution mechanisms of the top-50 DeFi protocols and documents significant variation in how tokens are allocated to users, investors, and developers. We find that several protocols distribute a greater share of tokens to insiders, such as through private sales and developer allocations, rather than to users via incentives and airdrops. We present evidence that protocols with greater insider control exhibit fewer deposits, lower token values, and increased risk. Using an event-study analysis, we find significant increases in protocol deposits post-airdrops. Our results suggest that DeFi users prefer user-centric governance models and are sensitive to the risks of insider control. Lastly, this paper discusses the risks and challenges of DeFi governance.
ABSTRACT This article proposes a framework to assess the factual decentralization of blockchain-based financial infrastructure, commonly referred to as ‘decentralized finance’ (DeFi). It discusses various centralization vectors along the DeFi architecture layers from a technological and legal point of view. Distinguishing between endogenous and inherited centralization, the importance of decentralization assessments for regulators is demonstrated. First, centralization vectors are a strong indication that a DeFi project may have (some) custodial properties warranting regulation. Second, centralization vectors reveal the avenues of control in projects, pointing out appropriate regulatory hooks. The article serves as an interdisciplinary introduction that analyses blockchain-based financial infrastructure and provides policymakers and regulators with a tool to identify the differences between truly independent, neutral infrastructure and fake decentralization. It concludes that the former may have very beneficial properties and can contribute towards a more open and transparent financial system, while the latter is a blockchain-based form of financial intermediation and should be regulated as such.
The explosive growth of decentralized finance (DeFi) has revolutionized the accessibility and functionality of financial services. To gain valuable insights into this evolving ecosystem, analyzing transaction data using network analysis methodology proves to be highly effective. Network analysis allows us to uncover intricate relationships, patterns, and communities within the DeFi market by examining participant transactions. We model nodes group representing actors or wallet addresses, and edges represent transactions between wallet addresses. This study focuses on three prominent DeFi token-based Ethereum protocols: DAI, UNI, and WBTC. We analyzed 5,802,742 transaction data spanning from January 2022 to January 2023 of those three tokens. Using network topology metrics, we uncover market size, average transaction of each wallet address, market density, and reachability (diameter). We also detect the presence of transaction clusters and grouping quality using the modularity metric. At last, we employ centrality calculation to identify the most important wallet address and their role in the market. We gain insight by comparing those three tokens and reveal valuable insight into patterns and relationships, network dynamics, decentralized nature, and the presence of intermediaries in the token economy market. Our objective is to uncover hidden dynamics and trace asset flows, which can provide valuable information to market participants, regulators, and innovators seeking to optimize the DeFi infrastructure, ensure stability, and mitigate risks. Leveraging the power of network analysis offers the potential to shape the future of DeFi by enhancing efficiency, security, and accessibility, thereby fostering financial inclusion and empowering individuals and businesses globally.
Financial markets are undergoing an unprecedented transformation. Technological advances have brought major improvements to the operations of financial services. While these advances promote improved accessibility and convenience, traditional finance shortcomings like lack of transparency and moral hazard frictions continue to plague centralized platforms, imposing societal costs. In this paper, we argue how these shortcomings and frictions are being mitigated by the decentralized finance (DeFi) ecosystem. We delve into the workings of smart contracts, the backbone of DeFi transactions, with an emphasis on those underpinning token exchange and lending services. We highlight the pros and cons of the novel form of decentralized governance introduced via the ownership of governance tokens. Despite its potential, the current DeFi infrastructure introduces operational risks to users, which we segment into five primary categories: consensus mechanisms, protocol, oracle, frontrunning, and systemic risks. We conclude by emphasizing the need for future research to focus on the scalability of existing blockchains, the improved design and interoperability of DeFi protocols, and the rigorous auditing of smart contracts.
Decentralized Finance (‘DeFi’) has gained tremendous momentum over the past three years by using novel approaches to disintermediating financial institutions in the provision of financial services. However, empirical research in this field is still rare, and a more comprehensive understanding of the domain is a missing component in academic research. This paper develops a taxonomy based on a comprehensive literature analysis to structure this emerging field systematically. The taxonomy includes three perspectives (strategy, organization, technology) and seven dimensions (blockchain, value proposition, token type, business process, price mechanism, protocol type, integration type) as well as thirty-six characteristics. The application of the taxonomy to 278 DeFi start-ups reveals that most of the DeFi start-ups focus on Ethereum (36.3%) and have a focus on analytics and automation (52%), while, surprisingly only a few incorporate decentralized governance approaches (3.3%), provide decentralized exchanges (14%) or integrate off-chain data.
Decentralized finance (DeFi), which executes financial transactions using blockchain without an intermediary, has attracted over US$250 billion in total value locked (TVL) at its peak. However, little is known about how DeFi protocols assure users of the safety of their investments. This paper provides the first empirical evidence on DeFi audit services that check and verify the smart contracts underlying these protocols. Using data on 316 of the largest protocols, we find that those vetted by more smart contract auditors and by higher quality auditors have higher TVL and that these protocols have higher market capitalization (native token values). Using an event study approach, we document that TVL and token values significantly increase after a protocol's first audit, especially those involving a high-quality auditor. We also find that protocols with more auditors and higher audit quality exhibit a smaller drop in TVL and token values after the collapse of the TerraUSD stablecoin, which reduced aggregate DeFi TVL by almost 65%. Overall, our findings suggest that DeFi users and investors perceive audits as providing assurance regarding the safety of their deposits and investments.
2007 yılında ABD`de başlayan `Mortgage Krizi` çok geçmeden bütün dünya ekonomisini 2008 yılında etkisi altına almıştır. Ülke ekonomilerinde oluşan kriz, finansal piyasalarda çöküş ve dijital ortamlarda gelişmeler sonucunda 2009 yılında ilk kripto para birimi olan Bitcoin’in ön plana çıkmasına yol açmıştır. Günümüzde yüksek piyasa değerine sahip olması, merkezi yönetim sisteminin olmaması, anonimliği ve sağladığı birçok avantajlar bakımından dikkatleri üzerine çekmiş ve geleneksel yatırım araçlarına rakip olup olmaması her zaman tartışma konusu olmuştur. Bu yüzden araştırmacılar tarafından Bitcoin ile ilgili farklı yaklaşımlar ve yöntemler kullanılarak çalışmalar yapılmıştır. Bu çalışmanın temel amacı Bitcoin fiyatı ile Yükselen Piyasa Ekonomileri`nin borsa endeksleri ve diğer önemli değişkenler arasında ilişkinin boyutu ve yönünün belirlenmesidir. Ayrıca Bitcoin`in geleneksel yatırım araçlarına alternatif mi yoksa bir balon mu olduğunu belirlemek amaçlanmıştır. Uygulanan testler sonucunda bazı Yükselen Piyasa Ekonomileri ülkelerinde Bitcoin ile borsa endeksleri ve diğer değişkenler arasında istatistiksel olarak anlamlı ilişki bulunmuştur ve o ülkeler için Bitcoin`in alternatif yatırım aracı olduğu sonucuna ulaşılmıştır.
NFTs (Non-Fungible Tokens) have experienced an explosive growth and their record-breaking prices have been witnessed. Typically, the assets that NFTs represent are stored off-chain with a pointer, e.g., multi-hop URLs, due to the costly on-chain storage. Hence, this paper aims to answer the question: Is the NFT-to-Asset connection fragile? This paper makes a first step towards this end by characterizing NFT-to-Asset connections of 12,353 Ethereum NFT Contracts (6,234,141 NFTs in total) from three perspectives, storage, accessibility and duplication. In order to overcome challenges of affecting the measurement accuracy, e.g., IPFS instability and the changing availability of both IPFS and servers' data, we propose to leverage multiple gateways to enlarge the data coverage and extend a longer measurement period with non-trivial efforts. Results of our extensive study show that such connection is very fragile in practice. The loss, unavailability, or duplication of off-chain assets could render value of NFTs worthless. For instance, we find that assets of 25.24% of Ethereum NFT contracts are not accessible, and 21.48% of Ethereum NFT contracts include duplicated assets. Our work sheds light on the fragility along the NFT-to-Asset connection, which could help the NFT community to better enhance the trust of off-chain assets.
In this paper, we propose a fully decentralized and smart contract-based insurance protocol. We identify various issues in the Decentralized Finance (DeFi) insurance context and propose a solution to overcome these shortcomings. We introduce an economic model that allows for risk transfer without any external dependencies or centralized intermediaries. In particular, our proposal does not need any sort of subjective claim assessment, community voting or external data providers (oracles). Moreover, it solves the problem of over-insurance and proposes various ways to mitigate the capital inefficiencies usually seen with DeFi collateral. The work takes inspiration from peer-to-peer (P2P) insurance and collateralized debt obligations (CDO). We formally describe the protocol, assess its efficiency and key properties and present a reference implementation. Finally, we address limitations, extensions and ideas for further research.
Yatırım, tasarruf sahiplerinin finansal sürdürülebilirliğin güvence altına alınmasını sağlayan önemli bir araçtır. Bu nedenle yatırım kararlarının belirlenmesi ve portföy oluşturma süreçleri güncelliğini yitirmeyen bir araştırma konusu olagelmiştir. Bu çalışmada son yıllarda çok sayıda tartışmaya konu olan Bitcoin’in portföyler için doğru bir alternatif olup olmadığı tartışılmaktadır. Portföyler oluşturulurken çeşitliliği artırmak için Dolar, Euro, Bitcoin, Bist100 ve Altın alternatif yatırım araçları ele alınmıştır. Portföyler eşit oranlı bir dağılıma sahip olacak şekilde beş yatırım aracının olası tüm kombinasyonlarından oluşturulmuştur. Yatırım kararı, çok kriterli karar verme problemi olarak ele alınmış ve değerlendirme için yıllık getiri göstergesi, yıllık değişim oranı ve varyans katsayısı olacak şekilde üç kriter belirlenmiştir. Kriterlerin ağırlıkları nesnel bir yaklaşım olan MEREC yöntemiyle hesaplanmış ve alternatif seçimi VIKOR yöntemiyle gerçekleştirilmiştir. Çalışmada, Bitcoin’in portföy çeşitlendirmek için uygun bir alternatif olduğu sonucuna ulaşılmıştır.
On November 22nd 2022, the lending platform AAVE v2 (on Ethereum) incurred bad debt resulting from a major liquidation event involving a single user who had borrowed close to \$40M of CRV tokens using USDC as collateral. This incident has prompted the Aave community to consider changes to its liquidation threshold, and limitations on the number of illiquid coins that can be borrowed on the platform. In this paper, we argue that the bad debt incurred by AAVE was not due to excess volatility in CRV/USDC price activity on that day, but rather a fundamental flaw in the liquidation logic which triggered a toxic liquidation spiral on the platform. We note that this flaw, which is shared by a number of major DeFi lending markets, can be easily overcome with simple changes to the incentives driving liquidations. We claim that halting all liquidations once a user's loan-to-value (LTV) ratio surpasses a certain threshold value can prevent future toxic liquidation spirals and offer substantial improvement in the bad debt that a lending market can expect to incur. Furthermore, we strongly argue that protocols should enact dynamic liquidation incentives and closing factor policies moving forward for optimal management of protocol risk.
De-banking is the closure of banking facilities by a bank for reasons such as a risk of money laundering. De-banking the Australian Cryptocurrency Exchange (‘Crypto Exchange’) industry could mean that Australian banks fall foul of competition law. In 2021, an Australian Senate inquiry investigated how to regulate cryptocurrencies, including considering de-banking. This article outlines a possible system that reduces the risk to banks of providing banking services to the Australian Crypto Exchange industry. Regulators should continue to adopt a collaborative market governance approach, working with cryptocurrency financial technologies to survey Crypto Exchange operating models. Then they should create an operating model licensing regime and updated Crypto Exchange-specific anti-money laundering (‘AML’) compliance frameworks. That regime would differentiate both centralised and decentralised; and custodian and non-custodian Crypto Exchanges, streamlining this licensing regime for banks. An AML-compliant self-certification system for Crypto Exchanges unable to be licensed is another suggestion. On 20 October 2021, the final Senate Inquiry Report also recommended a similar licensing regime.