Peter Eklund, Jonas Sveistrup Søgaard, Lasse Herskind, jason Spasovski
This paper examines the feasibility of blockchain solutions for national and transnational business-to-business and business-to-government (B2B/B2G) compliance frameworks, namely a trust-less, de-centralised, self-regulating distributed ledger. In particular, the paper examines whether blockchain platforms scale to support national and transnational e-business trading.
The financial services industry is navigating a period of profound technological disruption, driven by the twin forces of blockchain technology and Decentralized Finance (DeFi). This paper provides a scholarly analysis of the impact these innovations are having on core banking functions, with a specific focus on the payments sector, a critical domain for core bankers. We posit that blockchain and DeFi are not merely incremental improvements but represent a fundamental paradigm shift, challenging the operational and business models of traditional finance (TradFi). The paper begins by establishing a theoretical framework, deconstructing blockchain's core tenets and the principles of DeFi. It then critically examines the application of these technologies to payments, lending, and asset management. Through a comparative analysis of payment architectures and detailed case studies—including J.P. Morgan's Onyx platform, the Aave lending protocol, and real-world asset tokenization—we illustrate the practical implications and transformative potential. Finally, the paper addresses the significant challenges and risks, including regulatory uncertainty, technological vulnerabilities, and operational integration hurdles. We conclude that while DeFi presents an existential challenge to incumbent institutions, it also offers an unprecedented opportunity for those willing to adopt a hybrid model, integrating decentralized technologies to enhance efficiency, transparency, and client value in the new digital economy.
Automated Market Makers (AMMs) have cemented themselves as an integral part of the decentralized finance (DeFi) space. AMMs are a type of exchange that allows users to trade assets without the need for a centralized exchange. They form the foundation for numerous decentralized exchanges (DEXs), which help facilitate the quick and efficient exchange of on-chain tokens. All present-day popular DEXs are static protocols, with fixed parameters controlling the fee and the curvature - they suffer from invariance and cannot adapt to quickly changing market conditions. This characteristic may cause traders to stay away during high slippage conditions brought about by intractable market movements. We propose a Reinforcement Learning (RL) framework to optimize the fees collected on an AMM protocol. In particular, we develop a Q-Learning Agent for Market Making Protocols (QLAMMP) that learns the optimal fee rates and leverage coefficients for a given AMM protocol and maximizes the expected fee collected under a range of different market conditions. We show that QLAMMP is consistently able to outperform its static counterparts under all the simulated test conditions.
Decentralized finance (DeFi) protocols use blockchain-based tools to mimic banking, investment and trading solutions and provide a viable framework that creates incentives and conditions for the development of an alternative financial services market. In this respect, they can be seen as alternative financial vehicles that mitigate portfolio risk, which is particularly important at a time of increasing uncertainty in financial markets. In particular, some DeFi protocols offer an automated, low-risk way to generate returns through a “delta-neutral” trading strategy that reduces volatility. The main financial operations of DeFi protocols are implemented using appropriate algorithms, but unlike traditional finance, where issues of value and valuation are commonplace, DeFis lack a similar value-based analysis. The aim of this study is to evaluate relevant DeFi performance metrics related to the valuations of these protocols through a thorough analysis based on various scientific methods and to show what influences the valuations of these protocols. More specifically, the study identifies how DeFi protocol valuations depend on the total value locked and other performance variables, such as protocol revenue, total revenue, gross merchandise volume and inflation factor, and assesses these relationships. The study analyzes the valuations of 30 selected protocols representing three different classes of DeFi (i.e., decentralized exchanges, lending protocols and asset management) in relation to their respective performance measures. The analysis presented in the article is quantitative in nature and relies on Granger causality tests as well as the results of a fixed effects panel regression model. The results show that the valuations of DeFi protocols depend to some extent on the performance measures of these protocols under study, although the magnitude of the relationships and their directions differ for the different variables. The Granger causality test could not confirm that future DeFi protocol valuations can be effectively predicted by the TVLs of these protocols, while other directions of causality (one-way and two-way) were confirmed, e.g., a two-way causal relationship between DeFi protocol valuations and gross merchandise volume, which turned out to be the only variable that Granger-causes future DeFi protocol valuations.
Abstract Can currency competition affect central banks’ control of interest rates and prices? Yes, it can. In a two-currency world with competing cash (material or digital), the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In any case, the government has full control of the inflation rate. With an interest-bearing digital currency, equilibria in which government currency loses medium-of-exchange property are ruled out. This benefit comes at the cost of relinquishing control over the inflation rate.
Nov 15, 2022·Zeitschrift für schweizerische Statistik und Volkswirtschaft/Schweizerische Zeitschrift für Volkswirtschaft und Statistik/Swiss journal of economics and statistics
Basil Guggenheim, Sébastien Kraenzlin, Christoph Meyer
Abstract We use unique individual bank-to-bank repo transaction data to empirically assess the efficiency of the existing Swiss financial market infrastructure (FMI) for executing delivery versus payment transactions. This approach enables us to identify its current benefits and drawbacks as well as where new technologies, such as distributed ledger technology, could provide a remedy. We find that the fastest settlement time for repo transactions is 12 s, but that settlements are often delayed by more than 10 min due to the lack of collateral availability. We conclude that the cross-border availability of securities needs to be addressed by either improving interoperability of existing infrastructures or using new technologies.
Jonathan Chiu, Charles M. Kahn, Thorsten V. Koeppl
Abstract In this viewpoint article, we provide an analysis of the value proposition of decentralized finance (DeFi) and its limitations using a simple stylized model of collateralized lending. DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs associated with intermediated lending and improve financial inclusion. Limitations are the volatility of crypto collateral and stablecoins used for settlement, the possible incompleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limitations could improve the value of DeFi.
Decentralized Finance, or DeFi, is a financial ecosystem built on blockchain technology, aiming to recreate traditional financial services without the need for central authorities like banks or intermediaries. It is a growing ecosystem of financial applications and services built on blockchain technology. Unlike traditional finance, which relies on centralized institutions like banks, DeFi leverages peer-to-peer (P2P) networks to facilitate financial transactions. Traditional financial systems often leave individuals and communities, particularly those in developing economies or marginalized groups, excluded due to limited access, high transaction costs, and stringent regulations. Decentralized Finance (DeFi) emerges as a potential solution, leveraging blockchain technology to offer an alternative financial ecosystem built on transparency, disintermediation, and accessibility. This paper investigates the potential of DeFi in fostering financial inclusion and economic empowerment. DeFi has gained traction in India, with a growing interest in blockchain-based financial services. However, regulatory uncertainties have led to some cautiousness. Indian regulators are exploring frameworks to address potential risks while encouraging innovation in the DeFi space. As the regulatory landscape evolves, the adoption and development of DeFi in India are likely to be influenced by government policies and industry collaborations
The always-available liquidity of automated market makers (AMMs) has been one of the most important catalysts in early cryptocurrency adoption. However, it has become increasingly evident that AMMs in their current form are not viable investment options for passive liquidity providers. This is large part due to the cost incurred by AMMs providing stale prices to arbitrageurs against external market prices, formalized as loss-versus-rebalancing (LVR) [Milionis et al., 2022]. In this paper, we present Diamond, an automated market making protocol that aligns the incentives of liquidity providers and block producers in the protocol-level retention of LVR. In Diamond, block producers effectively auction the right to capture any arbitrage that exists between the external market price of a Diamond pool, and the price of the pool itself. The proceeds of these auctions are shared by the Diamond pool and block producer in a way that is proven to remain incentive compatible for the block producer. Given the participation of competing arbitrageurs to capture LVR, LVR is minimized in Diamond. We formally prove this result, and detail an implementation of Diamond. We also provide comparative simulations of Diamond to relevant benchmarks, further evidencing the LVR-protection capabilities of Diamond. With this new protection, passive liquidity provision on blockchains can become rationally viable, beckoning a new age for decentralized finance.
Non-fungible tokens (NFT) have recently emerged as a novel blockchain-hosted financial asset class that has attracted major transaction volumes. However, preprocessing and analysis of NFT transaction data, which investors often rely on for their investment decisions, pose several challenges not commonly encountered in traditional financial data. These challenges arise mainly due to the non-fungible nature of NFTs as well as the intrinsic characteristics of the blockchain, the primary data source for NFT transactions. Using data consisting of the transaction history of eight highly valued NFT collections, a selection of such challenges is illustrated. These include price differentiation by token traits, the possible existence of lateral swaps and wash trades in the transaction history, and finally, severe price volatility. This paper provides an overall summary of the challenges associated with data analytics on NFT transaction data and lay a foundation for future research on the topic.
Abstract This article examines current technological trends in the securities post-trading system and the role of law in shaping these developments. Against this backdrop, we analyse (i) recent initiatives that aim at technologically improving the traditional post-trade system, (ii) projects that aim at enhancing the efficiency of post-trade processes related to traditional securities by using distributed ledger technology and (iii) post-trade issues related to the rise of crypto-assets and decentralised finance. We argue that the current role of law in shaping these technological trends is different in these three contexts. Regarding crypto-assets, the law can be likened to the hare in the Brother Grimms’ well-known fairy tale: It struggles in vain to keep up with developers in the crypto-asset system (who represent the hedgehog in the fairy tale). With regard to projects that aim at bringing distributed ledger technology to the post-trading of traditional securities, the roles are, in our view, reversed – the law plays the role of the hedgehog that, maybe unfairly, prevents the innovators (the hare) from succeeding. Finally, as regards two important technological trends in the traditional post-trading system that we analyse in this article different relationships emerge: In one case, the law (as hedgehog) “coaches” the industry (as hare) in its quest to implement technological improvements. In the other case, the law (as hedgehog) needs to prod the industry (the hare) into relevant action.
Yield farming represents an immensely popular asset management activity in decentralized finance (DeFi). It involves supplying, borrowing, or staking crypto assets to earn an income in forms of transaction fees, interest, or participation rewards at different DeFi marketplaces. In this systematic survey, we present yield farming protocols as an aggregation-layer constituent of the wider DeFi ecosystem that interact with primitive-layer protocols such as decentralized exchanges (DEXs) and loanable funds (PLFs) protocol for loanable funds (PLF). We examine the yield farming mechanism by first studying the operations encoded in the yield farming smart contracts, and then performing stylized, parameterized simulations on various yield farming strategies. We conduct a thorough literature review on related work, and establish a framework for yield farming protocols that takes into account pool structure, accepted token types, and implemented strategies. Using our framework, we characterize major yield aggregators in the market including Yearn Finance, Beefy, and Badger DAO. Moreover, we discuss anecdotal attacks against yield aggregators and generalize a number of risks associated with yield farming.
El dinero es un bien público y, como tal, requiere la ordenación pública del sistema monetario y de pagos a niveles nacional e internacional. Las categorías jurídicas tradicionales —como la moneda de curso legal (legal tender en inglés)— se están adaptando, a veces con dificultad, al espacio digital, puesto que las leyes de los bancos centrales hablan de monedas, billetes y reservas, pero no de monedas digitales, tókenes o tecnología de contabilidad distribuida (distributed ledger technology o DLT). El artículo presenta la tricotomía del dinero digital: criptomonedas, monedas estables (stablecoins) y monedas digitales de los bancos centrales (central bank digital currencies o CBDC), además de considerar la forma en que esta tricotomía reta la noción tradicional de la soberanía monetaria, lo que reaviva el debate entre la teoría estatal del dinero y la teoría social o de mercado del dinero. El artículo examina en particular cuándo, cómo y por qué la digitalización llegó a la banca central, y cómo responden distintas jurisdicciones a la hora de diseñar las CBDC. Finalmente, analiza también aspectos internacionales, al recordar cómo la idea de una moneda global se remonta al Bancor de John Maynard Keynes, y cómo sería posible crear una criptomoneda global que podría circular junto con las criptomonedas nacionales o regionales.
In this paper, we sought to assess the factors explaining the repayment of loans by borrowers in SFDs in Togo using a Logit model. A regression analysis of data collected on a sample of 157 loan files shows that older borrowers and those more distant from the institution have a higher credit repayment score, while gender and the amount of credit received by the borrower negatively influence the credit repayment rate. Even if the credit repayment score does not depend on the activity that the borrower has undertaken or wants to undertake, it would be desirable for the SFDs to finance more commercial activities because they favor a rapid turnover of capital.
The advent of Web3 technology and the rise of decentralized finance (DeFi) have sparked a paradigm shift in the financial ecosystem. This paper delves into the transformative potential of DeFi protocols, exploring their structure, functionality, and impact on traditional financial systems. Through a comprehensive review of existing literature and empirical studies, we uncover the advantages and challenges associated with the adoption of DeFi. Our analysis highlights how DeFi platforms, including lending protocols, decentralized exchanges, stablecoins, and yield farming mechanisms, offer enhanced efficiency, reduced costs, and greater accessibility. However, we also underscore the critical issues surrounding security vulnerabilities, regulatory compliance, and market stability that must be addressed to ensure sustainable growth. By proposing critical research questions and suggesting future research directions, this paper contributes to the ongoing discourse on the role of DeFi in reshaping global finance and its potential to create a more inclusive, efficient, and transparent financial ecosystem.
Alexander Brauneis, Roland Mestel, Ryan Riordan, Erik Theissen
We study bitcoin to US dollar (BTCUSD) liquidity and liquidity determinants using order book data from three large cryptocurrency exchanges. The BTCUSD market is more liquid than US equity markets with bid–ask spreads often below 1 basis point. We find that BTCUSD liquidity is largely explained by same-exchange past liquidity, past cryptocurrency market-wide liquidity and volatility, and fees charged on the blockchain for bitcoin transfers. Surprisingly, we find that BTCUSD liquidity is unrelated to broader financial markets and financial market liquidity.
<strong>Abstract</strong> The purpose of this article is to provide an outline of cryptocurrency's function in the global financial system. Another important goal of this essay is to understand the basic notion of digital money and to assess the potential of cryptocurrencies in the global financial system. This will be a descriptive study in which an attempt will be made to investigate the many benefits and applications of cryptocurrencies. Digital financial assets are cryptocurrencies for which ownership and transfers of ownership are guaranteed by a cryptographically decentralised system. The rise in the market value of cryptocurrencies, as well as their growing popularity around the world, has created a slew of commercial and industrial economic issues and worries. Acceptance as a kind of alternative currency, as well as the prohibition of any fraudulent use, should be vigorously encouraged.
This paper investigates how blockchain technology may alter the defining mechanisms of residential real estate transactions in Sweden. It departs from the assumption that blockchain applications do not merely change complex socio-economic, organisational and governance arrangements of mature housing and mortgage markets. Rather, they may trigger resistance among incumbents in the current organisational model, which will drive incremental change. This analysis shows that housing transactions in Sweden are long and complex endeavours, underpinned by exclusivity, uncertainty and information inequalities. A public-private consortium led by Lantmäteriet – a Swedish government agency – has pioneered the use of blockchain technology for the conveyance of a house to address these deficiencies. This project has not moved beyond the proof-of-concept phase, while the socio-technical organisation of transactions has evolved. Insights from institutional and evolutionary approaches help conceptualise how technologically induced and qualitatively different structures and functional effects may change the way housing and mortgage markets will work, thereby highlighting both disruptive potentialities and limitations of blockchain applications for the legacy design underpinning the current Swedish housing transaction system. Following a forensic empirical approach, this paper dissects the organisational architecture, key practices and the linked network of actor groups running Sweden's property and mortgage markets. Results illustrate that understanding concrete blockchain-induced changes and their unintended consequences requires closer scholarly attention at the scale of actor networks, the types of knowledge and technologies, and the micro-geographies in which they are embedded. Such in-depth understanding enables better-informed assessments of the blockchain challenge for complex housing and mortgage markets.
Francesca Carapella, Edward J. Dumas, Jacob Gerszten, Nathan Swem · 5 authors
Decentralized finance (DeFi) refers to a set of newly emerging financial products and services that operate on decentralized platforms using blockchains to record and share data. DeFi products and services are conducted without a trusted central intermediary such as a bank, and they include payments, lending and borrowing, trading and investments, capital raising (crowdfunding), and insurance. An important innovation that allowed for the development of DeFi was the growth of programming capability on blockchains. This innovation allows for the creation of computer code called smart contracts that can be invoked by users without going through a centralized intermediary. DeFi may pose financial stability risks, that are exacerbated by the fact that both are currently largely outside the prudential regulatory perimeter, which we discuss.
The traditional banking functions of lending, deposit-taking and payment intermediation are being unbundled in the new frontiers of money that extend from virtual currencies to crypto-assets and from shadow payments to quasi-money. The possibility for digital-centred change in the financial industry is illustrated by distributed ledger technology, of which ‘blockchain’ is the most prominent example of automated decision-making. Other forms of decentralised supply of money, payment services, and funding processes may allow households and businesses to obtain loans and pool risks without having recourse to financial intermediaries. This article examines the alternative provision of access to low-cost zero-friction payments from the perspective of the underbanked. Promoting innovation through alternatives to credit means integrating vulnerable and excluded customers into mainstream financial systems. Blockchain technology backed by a possible modification of the law on the recognition and transfer of property rights might prove instrumental in unlocking the value of the assets possessed by the underbanked or even the unbanked.
Irina MNOHOGHITNEI, Alexandra HOROBEȚ, Lucian Belaşcu
Ever since the Global Financial Crisis, the financial system has seen an accelerated level of innovation. Bitcoin offered a decentralized alternative to money, with thousands of other cryptoassets quickly emerging. Most recently, Decentralized Finance (DeFi) promises to offer a new digital economy, with smart contracts replacing the need for financial intermediaries. This new market aims to reinvent traditional financial products in a more transparent and interoperable way. In this paper we aim to undertake an extensive literature review of the financial stability risks posed by the fast-growing DeFi market and assess these using the Financial Stability Board’s fintech framework. We find that DeFi could pose several challenges to traditional financial infrastructure, primarily by increasing interlinkages between cryptoassets and traditional financial markets. However, if DeFi evolves in a safe way, it could increase competition and financial inclusion with overall positive implications for financial stability.
Ziqiao Ao, Lin William Cong, Gergely Horváth, Luyao Zhang
Decentralized finance (DeFi) has the potential to disrupt centralized finance by validating peer-to-peer transactions through tamper-proof smart contracts, thus significantly lowering the transaction cost charged by financial intermediaries. However, the actual realization of peer-to-peer transactions and the levels and effects of decentralization are largely unknown. Our research pioneers a blockchain network study that applies social network analysis to measure the level, dynamics, and impacts of decentralization in DeFi token transactions on the Ethereum blockchain. First, we find a significant core-periphery structure in the AAVE token transaction network where the cores include the two largest centralized crypto exchanges. Second, we provide evidence that multiple network features consistently characterize decentralization dynamics. Finally, we document that a more decentralized network significantly predicts a higher return and lower volatility of the decentralized market of AAVE tokens on the Ethereum blockchain. We point out that our approach is seminal for inspiring future extensions related to the facets of application scenarios, research questions, and methodologies on the mechanics of blockchain decentralization.