Blockchain Papers

Alfred Lehar, Christine A. Parlour

No abstract is available for this record.

Nydia Remolina

Decentralized Finance, known as DeFi (Decentralized Finance), refers to the use of blockchain and digital assets or crypto-assets for the provision of financial services. In this way, through DeFi applications, services such as loans, insurance, crypto-asset exchanges, among others, are offered, which are structured based on crypto-assets and through technologically decentralized applications. This paper discusses the concept of DeFi and how it challenges the traditional market infrastructures of the financial sector, demystifying the idea of absolute decentralization, generally mentioned in the crypto-asset arena, from the perspective of decision-makers and governors of these decentralized applications. Subsequently, the paper analyzes the opportunities and challenges of DeFi for consumers, financial institutions, new competitors and financial regulators. Among the opportunities, the paper explains how DeFi could contribute to financial inclusion, to the automation of certain financial products and how it is a key factor for the development of metaverses. As part of the challenges, the paper analyzes the problems of money laundering and terrorist financing in these markets, financial consumer protection, corporate governance issues, the lack of transparency of these products, cybersecurity risks and systemic risk issues. Finally, the paper addresses some early regulatory responses that policymakers have tried in response to some of these challenges in different jurisdictions.

Ben Charoenwong, Robert M. Kirby, Jonathan Reiter

Decentralized Finance (DeFi) aims to use advancements in both computation and cryptography to tackle standard economic problems. It must, therefore, operate within the intersection of constraints required by both the computer science and economic domains. We explore a foundational question at the junction of those fields: is it possible to synthesize variable market-clearing risk-free yield for native tokens via smart contracts? We show using a stylized model representing a large class of existing decentralized consensus algorithms that this is not possible. This places strong bounds on what decentralized financial products can be built and constrains the shape of future developments in DeFi. Among other limitations, our results reveal that markets in DeFi are incomplete.

Aleksandr Aleksandrovich Samoshin

No abstract is available for this record.

Lennart Ante

This paper investigates the market reaction to large positive or negative liquidity shocks on the value of tokens traded on decentralized exchanges (DEXes) on the Ethereum blockchain. Automated market makers (AMMs) and constant product markets provide transparent and decentralized ways to directly swap two blockchain tokens for each other via the use of liquidity pools. Using trade-by-trade data of 2.77 million swaps of 14 different tokens traded on Uniswap v2, v3 and SushiSwap, we find that the size of sell orders significantly correlates with negative future token returns, while buy size positively correlates with future token returns. Using an event study approach, we quantify the market reaction of unusually large sell and buy orders (top 1% percentile) and identify that the market reaction outweighs the economic value of the event by a factor of -7.4 for sell orders and +4.4 for buy orders over a short-span trading window. In the case of sell orders, a high proportion of the abnormal return is already realized before the event, which indicates informed trading in the form of arbitrage or frontrunning via Miner Extractable Value (MEV). Looking at individual crypto assets, we find a mean reassessment of token value following short sales of up to 0.79% within just one follow-up trade (buy orders up to 0.50%). The findings indicate that price shocks may have a signaling effect but also that market capitalization may be an insufficient metric for assessing the liquidity and valuation of (inefficient) crypto assets. The results suggest multiple challenges for investor protection in decentralized finance (DeFi) markets.

Hugo Benedetti, Sebastián Labbé

No abstract is available for this record.

Axel Wieandt, Laurenz Heppding

The financial crisis of 2007-08 revealed that centralized finance (CeFi) relying on large, interconnected financial institutions is easily destabilized. Since the crisis, significant regulatory tightening, monetary easing, and new competitors (e.g., fintechs) have created significant pressure on profit margins and CeFi business models. Recently, a new form of financial intermediation that functions independently of centralized intermediaries has emerged, namely decentralized finance (DeFi). DeFi relies on public, permissionless blockchains and uses so-called smart contracts to perform financial services such as borrowing, lending, and trading in a transparent and automated fashion. The paper gives an overview of DeFi and discusses its advantages and disadvantages compared to CeFi. We analyze different scenarios about the future paths of CeFi and DeFi, concluding that a convergence scenario is most likely.

Martin Brennecke, Tobias Guggenberger, Benjamin Schellinger, Nils Urbach

Countless decentralized finance (DeFi) applications of the past years have suffered from the high volatility and speculative behavior surrounding their underlying crypto assets. While the academic debate has been flourishing in these areas, Decentralized Autonomous Organizations (DAOs) have not received as much attention. This is the case even though they could offer an opportunity to solve some of the underlying problems of existing cryptocurrencies and ecosystems, for example, by providing lower volatility and, thus, exchange rate stability. This paper presents an economic analysis of the MakerDAO, a DAO in DeFi. In doing so, we use a single case study methodology based on existing resources and expert interviews. It also uses monetary theory instruments to provide researchers and developers with insights into how DAOs are governed. Further, it serves to illustrate how IS research may support the development of future IT artifacts aimed at offering the infrastructure for DeFi applications.

Paul P. Momtaz

No abstract is available for this record.

R. Velmurugan, J. Sudarvel, Ravi Thirumalaisamy

Cryptocurrencies and decentralized finance (DeFi) are reshaping how value is created, exchanged, and governed, and this chapter positions them as more than speculative instruments by reading them as an emerging financial infrastructure. In an ideal digital economy, programmable money supports low-friction transactions, broad participation, and transparent rules, while users retain control without surrendering trust to dominant intermediaries. Yet that ideal remains unevenly realized: markets still absorb extreme volatility, smart contracts still fail under adversarial conditions, and regulatory responses still oscillate between accommodation and restriction, leaving innovation and consumer protection in tension. Prior scholarship has mapped the monetary properties of Bitcoin as a scarcity-driven “digital store of value,” and it has framed Ethereum as the computational base layer that makes smart contracts—and therefore DeFi—possible. Studies on decentralized exchanges, lending protocols, automated market makers, and liquidity incentives have shown how 328 intermediated functions can be replicated through code, but they have also documented exploit patterns, oracle manipulation, governance capture, and composability risks that propagate across protocols. What remains underdeveloped is an integrated account that connects asset design, protocol architecture, and institutional constraints into a single explanatory model. To address this gap, the study advances a sociotechnical framework that links blockchain trust primitives with financial intermediation theory. By tracing how cryptocurrencies supply liquidity and collateral to DeFi, while DeFi amplifies token utility and systemic exposure, the chapter clarifies the conditions under which decentralized finance can mature into a resilient, inclusive financial ecosystem.

Fernando Álvarez, David Argente, Diana Van Patten

A currency's essential feature is to be a medium of exchange. We leverage a quasi-natural experiment-El Salvador as the rst country to make bitcoin legal tender-to study a cryptocurrency's potential to be used in daily transactions. The government also launched and provided incentives to download and use a digital wallet named Chivo, which shares features with Central Bank Digital Currencies (CBDCs) and allows users to trade bitcoin and dollars. Were Chivo Wallet and bitcoin actually adopted after this "big push"? Conducting a representative face-to-face survey and relying on blockchain data to obtain all Chivo transactions, we document how usage of digital payments and bitcoin is low, concentrated, and has been decreasing over time. We nd that privacy concerns are key barriers to adoption, which speaks to a policy debate on crypto and CBDCs that has had anonymity at its core. We also estimate the technology's adoption cost and its network externalities.

Özerk Yavuz

In the last decade as a result of the changes in business landscape new payment systems have evolved. Some of the Consumers, business stakeholders, investors and individuals turned to different types of payment systems and virtual currencies for various reasons. Peer to peer architectured Bitcoin which uses a blockchain mechanism is one of these approaches that found place in our lives. In this study, a leading indicator focused data mining methodology has been followed in analyzing Bitcoin market value and bitcoin valuation. Several classification and clustering algorithms applied to the data following a literature review, pre-processing of the data and conceptual framework formation. Finaly performances of these supervised and unsupervised machine learning techniques with rules discovered have been compared, assessed and presented for this type of problem and research domains.

Silviu OJOG

Decentralized finance (DeFi) is the term used to describe financial applications and services built on blockchain, the technology behind cryptocurrencies. DeFi uses blockchain as a trust mechanism, enabling unknown parties to transact with each other, removing unnecessary intermediaries, and lowering transaction costs. In order to seize the potential of blockchain technology in this particular industry and how it can be translated into other niches, it is necessary to understand its mechanics, implications, and particularities. This paper aims to present the operating principles, technologies, and security implications related to blockchain-based decentralized finance.

Havva GÜLTEKİN, Adil Oğuzhan

Son dönemlerde Bitcoin, bir yatırım ve ödeme aracı olarak yatırımcılar açısından oldukça popüler hale gelmiştir. Yatırımcıların dikkatle takip ettikleri bu sanal para biriminin finansal piyasalara etkisi açısından çalışmada Bitcoin ve BİST100 endeksi arasındaki eş bütünleşme ilişkisi incelenmiştir. Bu amaçla 14.08.2017-13.04.2021 dönemi günlük verileri kullanılmış ve Maki eş bütünleşme testi ile analiz gerçekleştirilmiştir. Elde edilen sonuçlar Bitcoin ve BİST100 endeksi arasında eş bütünleşme ilişkisinin olmadığını göstermektedir. Bunun yanında Hatemi-J nedensellik testi kullanılarak değişkenler arasında kısa dönemli asimetrik ilişkilerin varlığı test edilmiş ve test sonucuna göre yalnızca BİST100 endeksindeki pozitif bir şokun Bitcoin fiyatlarında pozitif bir şoka neden olduğu belirlenmiştir.

Patrick Schueffel

DeFi, short for decentralized finance, is a new paradigm that enjoys increasing popularity in the financial world. DeFi posits that financial services should not rely on centralized intermediaries but should be provided by users for users. This is done by deploying software components to a decentralized peer-to-peer system which is grounded on blockchain technology. This introductory text discusses the origins of DeFi and delineates DeFi characteristics from those of traditional finance. Several examples of DeFi applications are given, the disadvantages resulting from this paradigm are discussed, and an outlook is provided.

Vijak Sethaput, Supachate Innet

Central Bank Digital Currency (CBDC) is a digital version of domestic currency with the unit of account equivalent to its domestic currency. Blockchain can be used to implement CBDC to execute and settle peer-to-peer transactions. With the emergence of private money such as cryptocurrencies and stable coins and the growing use of digital payments to lessen the global pandemic spread, CBDC is an active research area among the central banks worldwide. Many central banks started their CBDC projects by building proofs of concept (PoCs) to replicate wholesale payment systems and expand their investigation into other use cases such as delivery versus Payment (DvP) and cross-border remittance. PBoC, China Central Bank, has already started a pilot testing of their digital currency. This paper discusses the application of blockchain for CBDC by presenting CBDC projects by central banks. Moreover, this paper analyses issues, identify challenges, and discusses future works in this rapidly evolving field.

Pablo de Andrés, David Arroyo, Ricardo Correia, Álvaro Rezola

This article analyzes the main problems and the solutions adopted in the market for Initial Coin Offerings (ICO), to anticipate the future of this market and determine implications for issuers, investors and regulators. ICOs represent an alternative and innovative financing solution that has experienced spectacular growth and notoriety in recent years. ICOs rely on Blockchain protocols and the ICO market is, therefore, characterized as decentralized, disintermediated and unregulated. Our results show that although the ICO market is innovative, it already displays many of the problems of traditional financial markets, and that these problems were at the genesis of the last financial crisis. Our analysis of the problems and solutions adopted shows a tension between what the Blockchain technology offers, and the problems associated with the financing of innovation. Considering the problems and solutions adopted, we no longer expect the ICO market to be characterized as disintermediated, unregulated or even decentralized in the near future. Furthermore, it is a real possibility that ICOs may end up being a progressor model eventually replaced by similar but more specialized financing models, some of which may already exist. With respect to the particular solutions of the ICO market, while some represent the realization of the potential of Blockchain, others such as forks have important Governance implications with the potential to create as many problems as the ones they address.

Stefan Kitzler, Friedhelm Victor, Pietro Saggese, Bernhard Haslhofer

We present a measurement study on compositions of Decentralized Finance (DeFi) protocols, which aim to disrupt traditional finance and offer services on top of distributed ledgers, such as Ethereum. Understanding DeFi compositions is of great importance, as they may impact the development of ecosystem interoperability, are increasingly integrated with web technologies, and may introduce risks through complexity. Starting from a dataset of 23 labeled DeFi protocols and 10,663,881 associated Ethereum accounts, we study the interactions of protocols and associated smart contracts. From a network perspective, we find that decentralized exchange (DEX) and lending protocol account nodes have high degree and centrality values, that interactions among protocol nodes primarily occur in a strongly connected component, and that known community detection methods cannot disentangle DeFi protocols. Therefore, we propose an algorithm to decompose a protocol call into a nested set of building blocks that may be part of other DeFi protocols. This allows us to untangle and study protocol compositions. With a ground truth dataset that we have collected, we can demonstrate the algorithm’s capability by finding that swaps are the most frequently used building blocks. As building blocks can be nested, that is, contained in each other, we provide visualizations of composition trees for deeper inspections. We also present a broad picture of DeFi compositions by extracting and flattening the entire nested building block structure across multiple DeFi protocols. Finally, to demonstrate the practicality of our approach, we present a case study that is inspired by the recent collapse of the UST stablecoin in the Terra ecosystem. Under the hypothetical assumption that the stablecoin USD Tether would experience a similar fate, we study which building blocks — and, thereby, DeFi protocols — would be affected. Overall, our results and methods contribute to a better understanding of a new family of financial products.

Hang Luo, Dawei Yan

This study proposes a simple two-period model to consider consumers’ borrowing behaviour in a decentralised consensus and information distribution platform. Based on this model, we develop a bank risk mitigation framework and find that decentralised digital identity and encryption technology are the most important factors for attaining market equilibrium between decentralised consensus and information distribution. Specifically, the greater the scope of digital identity construction and the more blockchain consensus records there are, the less likely the borrower will default. Our study provides meaningful practical implications for bankers and policy regulators to help them better understand consumers’ borrowing behaviour and decisions to default.

Junmo Song, Jiwon Kang

Over the last decade, Bitcoin has attracted a great deal of public interest and Bitcoin market has grown rapidly. One of the main characteristics of the market is that it often undergoes some events or incidents that cause outlying observations. To obtain reliable results in the statistical analysis of Bitcoin data, these outlying observations need to be carefully treated. In this study, we are interested in change point analysis for Bitcoin return series having such outlying observations. Since these outlying observations can affect change point analysis undesirably, we use a robust test for parameter change to locate change points. We report some significant change points that are not detected by the existing tests and demonstrate that the model allowing for parameter changes is better fitted to the data. Finally, we show that the model with parameter change can improve the forecasting performance of Value-at-Risk.

Matheus R. Grasselli, Alexander Lipton

We review different classes of cryptocurrencies with emphasis on their economic properties. Pure-asset coins such as Bitcoin, Ethereum and Ripple are characterized by not being a liability of any economic agent and most resemble commodities such as gold. Central bank digital currencies, at the other end of the economic spectrum, are liabilities of a Central Bank and most resemble cash. In between, there exist a range of so-called stable coins, with varying degrees of economic complexity. We use balance sheet operations to highlight the properties of each class of cryptocurrency and their potential uses. In addition, we propose the basic structure for a macroeconomic model incorporating all the different types of cryptocurrencies under consideration.

Kushal Babel, Philip Daian, Mahimna Kelkar, Ari Juels

We introduce the Clockwork Finance Framework (CFF), a general purpose, formal verification framework for mechanized reasoning about the economic security properties of composed decentralized-finance (DeFi) smart contracts. CFF features three key properties. It is contract complete, meaning that it can model any smart contract platform and all its contracts--Turing complete or otherwise. It does so with asymptotically constant model overhead. It is also attack-exhaustive by construction, meaning that it can automatically and mechanically extract all possible economic attacks on users' cryptocurrency across modeled contracts. Thanks to these properties, CFF can support multiple goals: economic security analysis of contracts by developers, analysis of DeFi trading risks by users, fees UX, and optimization of arbitrage opportunities by bots or miners. Because CFF offers composability, it can support these goals with reasoning over any desired set of potentially interacting smart contract models. We instantiate CFF as an executable model for Ethereum contracts that incorporates a state-of-the-art deductive verifier. Building on previous work, we introduce extractable value (EV), a new formal notion of economic security in composed DeFi contracts that is both a basis for CFF and of general interest. We construct modular, human-readable, composable CFF models of four popular, deployed DeFi protocols in Ethereum: Uniswap, Uniswap V2, Sushiswap, and MakerDAO, representing a combined 24 billion USD in value as of March 2022. We use these models along with some other common models such as flash loans, airdrops and voting to show experimentally that CFF is practical and can drive useful, data-based EV-based insights from real world transaction activity. Without any explicitly programmed attack strategies, CFF uncovers on average an expected $56 million of EV per month in the recent past.

Hamed Amini, Maxim Bichuch, Zachary Feinstein

In this paper, we construct a decentralized clearing mechanism which endogenously and automatically provides a claims resolution procedure. This mechanism can be used to clear a network of obligations through blockchain. In particular, we investigate default contagion in a network of smart contracts cleared through blockchain. In so doing, we provide an algorithm which constructs the blockchain so as to guarantee the payments can be verified and the miners earn a fee. We, additionally, consider the special case in which the blocks have unbounded capacity to provide a simple equilibrium clearing condition for the terminal net worths; existence and uniqueness are proven for this system. Finally, we consider the optimal bidding strategies for each firm in the network so that all firms are utility maximizers with respect to their terminal wealths. We first look for a mixed Nash equilibrium bidding strategies, and then also consider Pareto optimal bidding strategies. The implications of these strategies, and more broadly blockchain, on systemic risk are considered.

Patrick Fichtinger

Blockchain technology facilities multi-party applications that do not require the parties to trust each other, that are failure-resistant due to their decentralized nature, and that provide a consistent view on the transaction history. These properties make blockchains attractive for decentralized finance (DeFi), and in particular for trade finance, where parties do not necessarily trust each other and aim at reducing their financial risks.Traditionally, intermediaries like banks or fiduciaries provide such services – along with several inconveniences like the increased risk of fraud due to antiquated systems and processes, considerable settlement delays, and high costs.In this work, we focus on the financial instrument Letter of Credit (L/C), which is used to secure payments in international trade. We propose a method for evaluating blockchains for DeFi based on this use case. We adapt existing catalogues of criteria for platform evaluation to fit the development and operation of DeFi applications. After discussing and designing a prototype of a typical L/C workflow, we implement it on selected blockchain platforms. The evaluation rates the feasibility and usability of the development process.