Permissionless blockchains offer an information environment where users can interact privately without fear of censorship. Financial services can be programmatically coded via smart contracts to automate transactions without the need for human intervention or knowing user identity. This new paradigm is known as decentralized finance (DeFi). We investigate Compound (a leading DeFi lending protocol) to show how it works in this novel information environment, who its users are, and what factors determine their participation. On-chain transaction data shows that loan durations are short (31 days on average), and many users borrow to support leveraged investment strategies (yield farming). We show that systemic risk in DeFi arises from concentration and interconnection, and how traditional risk management practices can be challenging for DeFi.
During the global financial crisis in 2008, trust in established financial intermediaries declined sharply. In reaction, blockchain technology was developed as an alternative system to facilitate financial transactions devoid of intermediaries. The application of blockchain in the financial sector brought a new paradigm called Decentralized Finance. Employing a modified technology acceptance model, our study aims at examining the relationship of distrust in financial intermediaries and consumer’s behavioral intention to use Decentralized Finance. Even though this relationship is well-documented regarding the motivation of the development of blockchain technology, as well as in cases of unstable financial systems, empirical data from our survey research does not support this relationship in the context of consumer adoption. Our study contributes to the theory on the foundations of DeFi and the impact of blockchain technology, which must be revised by future research. Further, we propose a trust paradox in the financial sector.
Decentralized Finance (DeFi) offers the promise of an emergent alternative financial architecture that prioritizes disintermediation and decentralization to empower individuals along cryptoanarchist principles. Yet it is mired in considerable difficulties including market manipulation, distortionary incentives, excess short-termism, Ponzi-schemes, and money-laundering challenges that also foment a considerable level of dissuasion against DeFi’s wider adoption. This paper critically evaluates many of these important facets at a time when DeFi is emerging as a disintermediated and experimental financial praxis.
Bitcoin was conceptualized in response to perceived shortcomings in the monetary and financialsystem, not only related to large financial institutions but also to discretionary decision makingin monetary policy. Using high-frequency data and a weekly proxy VAR model, I study theimpact of monetary policy on Bitcoin. The paper shows that monetary shocks have sizableeffects on Bitcoin prices, but that these differ in sign: a disinflationary monetary tightening bythe ECB lowers valuations - consistent with the notion of Bitcoin as a digital gold -, whereasa Fed tightening increases Bitcoin prices. I document similar differences with respect to cen-tral bank information shocks and explore potential explanations by studying various aspects ofthe Bitcoin ecosystem. Exploiting both differences in Bitcoin valuations across currencies andblockchain transaction data, the paper shows that the increased demand for Bitcoin following aUS monetary tightening is primarily driven by emerging markets. I argue that this likely reflectsthe technological and institutional particularities of Bitcoin that make it sought after as globaldigital cashwhen international economic and financial conditions deteriorate.
Multiagent incentive contracts are advanced techniques for solving decentralized decision-making problems with asymmetric information. The principal designs contracts aiming to incentivize non-cooperating agents to act in his or her interest. Due to the asymmetric information, the principal must balance the efficiency loss and the security for keeping the agents. We prove both the existence conditions for optimality and the uniqueness conditions for computational tractability. The coupled principal-agent problems are converted to solving a Hamilton–Jacobi–Bellman equation with equilibrium constraints. Extending the incentive contract to a multiagent setting with history-dependent terminal conditions opens the door to new applications in corporate finance, institutional design, and operations research.
EIP-1559 is a proposal to make several tightly coupled additions to\nEthereum's transaction fee mechanism, including variable-size blocks and a\nburned base fee that rises and falls with demand. This report assesses the\ngame-theoretic strengths and weaknesses of the proposal and explores some\nalternative designs.\n
Uncertainties might compel many investors to hedge by buying globally traded assets, such as Bitcoin, which has also been used as a means of payment in several countries. Bitcoin does not originate from any centralized authority and cannot entirely be controlled; therefore, Bitcoin usage might potentially pose issues to the monetary authorities within a country. This paper analyzes the effect of both global and domestic uncertainty on Bitcoin's demand in Indonesia. Our result suggests that Bitcoin is used for hedging against uncertainties. The monetary policy implications of our results are also discussed.
The present research article shall outline how blockchain technology could be combined with insurance solutions against political risks. Through the definitions and the characterization of the key concepts of traditional insurance law and blockchain technology using case examples of specific political risks, it will be shown, how the insurance coverage of political risks could be achieved through smart insurance contracts in the future.
The reality is that we live in a society where a small group of people thinks they know better than we do and how we should live our lives. They don’t ever seem to realize that the power and wealth they surround themselves with is only possible because of the quiet acquiescence of the majority. They say employment is a record high, but fail to say wages have been going down in real terms for decades. This wall street elites and big head of governments and pharmaceutical businesses constantly keep telling the general population how great everything is but deep down we all know it’s not true as Recent estimates for global poverty are that 8.6 percent of the world, or 736 million people, live in extreme poverty on 1.90 dollars or less a day, according to the World Bank but we know in our bones it’s not true. But it could be and through technology, it will be. As the only answer to political and financial problems that assail us is to step outside the circus. That’s where cryptocurrencies come in, as they offer a secure form of transferring or recording ownership of our assets and the most important part is they function completely independently of governments. Whether you are with or against them cryptocurrencies represent one of the biggest bull markets in the history of finance and it’s the only boom that comes close to the California gold rush. So as a future Muslim Moroccan scientific researcher in the field of Cybersecurity and block-chain technology I couldn’t help but wonder how could we use this technology in my country to revolutionize the banking and Financial sector in it and especially after I learned that Morocco prohibited the use of bitcoin back in 2017. I then found myself asking the following questions: how does cryptocurrency conform to sharia’s Islamic teaching especially in Morocco? And how could the use of cryptocurrencies send shock waves across the Middle East?
The advent of Web 3.0, characterized by decentralized technologies such as blockchain, smart contracts, and decentralized finance (DeFi), is reshaping the global financial ecosystem. India, or Bharat, as it progresses towards becoming a developed economy, stands at a crossroads in its financial evolution. DeFi promises transparency, efficiency, and inclusivity, potentially offering solutions to longstanding issues in India's traditional financial infrastructure, such as limited access to banking services and inefficiencies in cross-border transactions. However, the decentralized nature of Web 3.0 also presents challenges, particularly regarding regulatory oversight, consumer protection, and financial stability. The need for a robust regulatory framework is critical to balance innovation with security. This abstract explores the potential of DeFi to accelerate India's financial inclusion goals while emphasizing the importance of regulatory policies to mitigate risks such as fraud, money laundering, and volatility. By analysing global case studies, existing Indian policies, and the trajectory of Bharat's financial sector, this paper aims to provide insights into how regulators can craft a forward-looking framework for DeFi. The goal is to support innovation while ensuring that India's financial evolution through Web 3.0 is sustainable, secure, and inclusive for all citizens, contributing to its vision of becoming a developed economy.
An economic analysis of what distributed ledgers can do, examining key components and discussing applications in both developed and emerging market economies. Distributed ledger technology (DLT) has the potential to transform economic organization and financial structures. In this book, Robert Townsend steps back from the hype and controversy surrounding DLT (and the related, but not synonymous, innovations of blockchain and Bitcoin) to offer an economic analysis of what distributed ledgers can do and a blueprint for the optimal design and regulation of financial systems. Townsend examines the key components of distributed ledgers, discussing, evaluating, and illustrating each in the context of historical and contemporary economies, reviewing featured applications in both developed economies and emerging-market countries, and indicating where future innovations can have large impact. Throughout, Townsend emphasizes the general equilibrium impact of DLT innovations, the welfare gains from these innovations, and related regulatory innovations. He analyzes four crucial components of distributed ledgers—ledgers as accounts, e-messages and e-value transfers, cryptography, and contracts—assessing each in terms of both economics and computer science, and forges some middle ground. Relatedly, Townsend highlights hybrid systems in which some of these components allow useful innovation while legacy or alternative pieces deal with the problem of scale. The specific applications he analyzes include an intelligent financial automated system that provides financial services to unbanked and under-banked populations, and cross-border payments systems, including financial systems that can integrate credit and insurance with clearing and settlement. Finally, Townsend considers cryptocurrencies, discussing the role and value of tokens in economies with distributed ledger systems. The open access edition of this book was made possible by generous funding from Arcadia – a charitable fund of Lisbet Rausing and Peter Baldwin.
Daniel Pérez, Sam M. Werner, Jiahua Xu, Benjamin Livshits
The trustless nature of permissionless blockchains renders overcollateralization a key safety component relied upon by decentralized finance (DeFi) protocols. Nonetheless, factors such as price volatility may undermine this mechanism. In order to protect protocols from suffering losses, undercollateralized positions can be liquidated. In this paper, we present the first in-depth empirical analysis of liquidations on protocols for loanable funds (PLFs). We examine Compound, one of the most widely used PLFs, for a period starting from its conception to September 2020. We analyze participants' behavior and risk-appetite in particular, to elucidate recent developments in the dynamics of the protocol. Furthermore, we assess how this has changed with a modification in Compound's incentive structure and show that variations of only 3% in an asset's dollar price can result in over 10m USD becoming liquidable. To further understand the implications of this, we investigate the efficiency of liquidators. We find that liquidators' efficiency has improved significantly over time, with currently over 70% of liquidable positions being immediately liquidated. Lastly, we provide a discussion on how a false sense of security fostered by a misconception of the stability of non-custodial stablecoins, increases the overall liquidation risk faced by Compound participants.
Abstract This chapter describes how the structure and governance of international trade finance—the oldest domain of international finance—evolved from the Middle Ages until today. Trade finance products initially consisted of idiosyncratic assets issued by local merchants and bankers. The financing of international trade then became increasingly centralized and credit instruments were standardized through the diffusion of the local standards of consecutive leading trading centers (Antwerp, Amsterdam, London). This process of market centralization/product standardization culminated in the nineteenth century when London became the global center for international trade finance and the sterling bill of exchange emerged as the most widely used trade finance instrument. The structure of the trade finance market then evolved considerably following World War I and disintegrated during the interwar deglobalization and Bretton Woods period. The reconstruction of global trade finance in the post-1970 period gave way to the decentralized market structure that prevails nowadays.
After the launch of Bitcoin in 2008 and the subsequent introduction of more than 6,600 cryptocurrencies, a new wave of innovative payment projects is currently on its way, including innovations like Libra - designed as a supranational stable coin - and central bank digital currencies (CBDCs). Various interrelations link these private and public projects. Contrary to the original intentions, Bitcoin has not developed into a widespread means of payments, not the least due to its considerable price volatility. Its most significant contribution could be the "proof of concept" for an innovative, private means of payment outside the conventional monetary system. In contrast, Libra is designed as a rather conventional means of payment with close relations with the existing banking sector, which raises numerous policy questions concerning monetary and financial stability. Central bank digital currencies could be viewed as a public sector response to these private projects to secure central banks' predominant role in the monetary system of the future.
The emergence of a decentralized peer-to-peer platform that matches lending and borrowing without collateral requirements has called the bank lending and balance-sheet channels for monetary transmission into question. Via a standard New Keynesian macroeconomic model expanded with two-sided platform and group identity, we put forward a novel platform density channel of monetary transmission, which could overshadow the conventional channels. An increase in policy rate, for instance, would instigate a shift toward platform borrowing. Increasing borrowers’ density attracts participation in platform deposits, which in turn further enhances borrowers’ benefit of joining the platform, making liquidity available at decreasing platform loan rates. Business investment and hence the inflation rate gets lifted despite monetary tightening. The implication of platform density channel diminishes, however, when platform borrowings complement bank borrowings, and pose nontrivial risk of default.
The Central Bank of China is testing its Digital Currency Electronic Payment (DCEP) in the cities of Shenzhen, Suzhou, Chengdu and Xunan with the involvement of four large state-owned banks in the ...
Purpose The most prominent and persistent problems of our global monetary system are instability and imbalances. We propose an international monetary model to solve these problems while at the same time move the model closer to Maqāṣid Sharīʿah (objectives of Sharīʿah). We name this an organic global monetary model or abbreviated as OGM. OGM is an international monetary model directly built on the national monetary system of each member country so that the two can co-exist. Design/methodology/approach Model design, theory and literature. Findings The model can eliminate interest rates at the central bank level, create non-tradable international money, and make a more stable international monetary system. Originality/value Original.
Umut Uyar, Göksal Selahatdin Kelten, Tuncay MORALI
Bireysel ve kurumsal yatırımcıların finansal piyasalarda yatırım kararları alırken sıklıkla kullandıkları analizler temel analiz ve teknik analiz şeklinde ikiye ayrılmaktadır. Temel analiz; makroekonomik gidişatı, sektörel gelişmeleri ve spesifik olarak yatırım yapılacak varlığın finansal göstergelerini dikkate alırken, teknik analiz; finansal varlıkların geçmiş fiyat hareketlerinden yola çıkarak bu finansal varlığın gelecekteki fiyat hareketlerini tahminlemeye çalışmaktadır. Teorik altyapısı Dow Teorisine dayanan ve “finansal varlığın geçmiş fiyat hareketleri zamanla tekrarlanacaktır” gibi bir takım varsayımlar barındıran teknik analiz yöntemine göre yatırım kararı alınırken çeşitli indikatörler, osilatörler ve formasyonlar kullanılmaktadır. Bu göstergelerden Hareketli Ortalamaların Yakınsaması/Uzaklaşması (MACD), Bollinger Band (BBand), Göreceli Güç Endeksi (RSI) yatırımcıların sıklıkla kullandıkları göstergeler arasındadır. Bu çalışmada 2014-2018 Bitcoin (BTC) ve Ethereum (ETH) günlük fiyat verileri kullanılarak MACD, BBand ve RSI test edilmiş, BTC ve ETH Al/Sat kararları tahmin edilmeye çalışılmıştır. Çıkan sonuçlar neticesinde kripto paraların yatırımcılara sağlayacağı getiriler hesaplanmıştır. Finansal piyasalarda en fazla işlem gören kripto paraların analiz edildiği çalışmada, yatırım kararlarında teknik analizin ne derece etkili olduğu ve bu yatırımlardan teknik analiz kullanılarak herhangi bir getiri sağlanıp sağlanamayacağı irdelenmiştir. Elde edilen bulgulara göre BBand, RSI ve MACD yöntemleri birbirleri ile çelişkili sinyaller verebilmektedir. Bu nedenle yatırımcıların kullanacakları analiz yöntemine göre kazanç ve kayıplarının farklılaşabileceğini söylemek mümkündür
Zusammenfassung Zahlreiche Zentralbanken planen innerhalb der nächsten Jahre, eigene digitale Zentralbankwährungen einzuführen. Die Blockchain-Technologie kann dafür die technologische Basis darstellen. Zentralbanken experimentieren mit dieser Technologie, um Währungen perspektivisch auf Blockchain-Basis abzubilden. Mögliche Vorteile einer digitalen Zentralbankwährung wären eine höhere finanzielle Stabilität, eine höhere Sicherheit und Effizienz im Zahlungsverkehr und ein höherer Automatisierungsgrad von Geschäftsprozessen. Risiken beständen darin, dass es nach einer Einführung zu einem digitalen Bank Run kommen könnte, dass Banken immens an Bedeutung verlieren könnten und letztlich die Datenschutzproblematik geklärt werden muss.