Jan 1, 2024·Proceedings of the ... Annual Hawaii International Conference on System Sciences/Proceedings of the Annual Hawaii International Conference on System Sciences
Vincent Gramlich, Tobias Guggenberger, Marc Principato, Benjamin Schellinger · 6 authors
Identities are an essential aspect of information systems (IS) as they allow users of a digital ecosystem to interact, build trust, and form relationships. Decentralized finance (DeFi) is a digital, blockchainbased ecosystem that has seen tremendous growth in the last years, however, it struggles with current identity implementations.While academics and practitioners have identified numerous implications, a scientific systematization of the role of identities in DeFi and their potentials and challenges is missing.By conducting a multivocal literature review, we rigorously gather the current knowledge and aggregate the different perspectives and concepts to present (I) a comprehensive conceptualization of identities in DeFi, (II) their potentials and challenges, and (III) concepts to manage the tension in between.Thereby, we aim to lay a foundation for future research on identities that increase DeFi's security, efficiency, and adoption while minimizing or eliminating the drawbacks for data privacy and censorship.
The present study aims to map the existing intellectual structure on Decentralized Finance (DeFi) risks.The study utilizes the systematic literature review (SLR) method to identify DeFi risks and the Scopus database to retrieve the pertinent literature.Further, authors select 50 research articles through abstract and title scanning, complete text analysis, and citation chaining to perform content analysis.Using content analysis, the present study identifies 21 DeFi risks segregated into four categories, namely technical, macro-economic, legal and regulatory, and user-centric risks.Additionally, the study provides unique research directions for the future.Hence, the present study contributes to the DeFi literature and has practical implications for DeFi entrepreneurs, individuals, developers, programmers, and policymakers.The study is the first of its kind that consolidates pertinent risks related to DeFi using the SLR method and broadens the knowledge of stakeholders in the DeFi ecosystem.
Abstract DeFi blockchain technology, known as decentralized finance today, separates from the traditional financial ecosystem and ushers the new financial landscape onto digital platforms. In decentralized financial applications, all digital assets are safeguarded by blockchain technology. Thanks to this technology, investors can transfer their financial assets without being dependent on banking authorities. Despite the numerous advantages they bring, financial assets based on the decentralized finance ecosystem come with certain disadvantages. These assets are difficult to control, easily manipulated, and are at risk due to their vulnerability to cyberattacks. This study conducted bibliometric analyses on a total of 930 publications registered in the Web of Science (WoS) and Scopus databases using the VOSviewer program. In both databases, “all fields” were filtered and scanned with the keyword “decentralized finance.” According to the results, the Scopus database has much richer content compared to the WoS database. The most cited author in the Scopus database was Chen Y, while in the WoS database, it was Nakomoto S. There has been a significant increase in the number of publications in both databases since 2020. Additionally, it was detected that the most cited countries in both databases were the USA, China and England, respectively. It has been observed that computer science comes to the fore in the publication rankings. Decentralized finance is an interdisciplinary field of study. Therefore, many more qualified hybrid studies are needed. More studies are needed, especially examining investor behavior. The analyses presented in this article will enable researchers to grasp the bigger picture from a holistic perspective.
Automated Market Maker (AMM)-based Decentralized Exchanges (DEXs) are crucial in Decentralized Finance (DeFi), but Ethereum implementations suffer from high transaction costs and price synchronization challenges. To address these limitations, we compare the XRP Ledger (XRPL)-AMM-Decentralized Exchange (DEX), a protocol-level implementation, against a Generic AMM-based DEX (G-AMM-DEX) on Ethereum, akin to Uniswap's V2 AMM implementation, through agent-based simulations using real market data and multiple volatility scenarios generated via Geometric Brownian Motion (GBM). Results demonstrate that the XRPL-AMM-DEX achieves superior price synchronization, reduced slippage, and improved returns due to XRPL's lower fees and shorter block times, with benefits amplifying during market volatility. The integrated Continuous Auction Mechanism (CAM) further mitigates impermanent loss by redistributing arbitrage value to Liquidity Providers (LPs). To the best of our knowledge, this study represents the first comparative analysis between protocol-level and smart contract AMM-based DEX implementations and the first agent-based simulation validating theoretical auction mechanisms for AMM-based DEXs.
In this paper, we investigate non-linear linkages between Bitcoin and the unconventional monetary policies of the European Central Bank (ECB). In particular, we examine whether a low-interest rate environment resulting from QE indirectly encourages investors to move towards Bitcoin. Using a Bayesian VAR model with time-varying coefficients and stochastic volatility (TVP-BVAR-SV model), we compare Bitcoin’s responses to the shadow rate shocks during the pre-and post-COVID-19 periods. Moreover, despite the high uncertainty and the low-interest rate environment, Bitcoin's response during the COVID-19 period reveals a steeper drop compared to the pre-COVID-19 period. That said, investors did not resort to Bitcoin for safety and higher returns. Our findings can be attributed to the unprecedented nature of the crisis, the investor reluctance and pessimism, and the changing behavior of Bitcoin, which is no longer perceived as a safe haven.
Decentralised finance has been fuelled by post-crisis distrust of traditional finance and financial intermediaries. This has led to the creation of systems based on distributed ledger technology and new forms of distributed governance. Nevertheless, distributed ledger technology systems have recently been examined for conventional markets, market infrastructures, payment systems, and even central bank digital currencies. Several factors (such as sub-sector, business model, and adequate power distribution) affect the level of decentralisation. Still, this phenomenon can have a relevant impact on European financial regulation, supervision, and relative principles. The conception of national and European financial regulations has been geared towards traditional intermediaries and centralised/hierarchical structures, which means they are not always compatible with distributed and non-proprietary systems. The European Union&s;s financial regulation might need to be adapted, as well as rethinking and further harmonising some underlying legal concepts and frameworks, such as for financial intermediation and business organisations. This chapter explores the main legal issues raised by financial disintermediation/decentralisation. The aim is to focus on their compatibility with European Union financial regulation, suggesting some possible links with central bank digital currencies discussions after providing a brief conceptual framework and a description of the recent distributed ledger technology ecosystems.
Sergio Luis Náñez Alonso, Miguel Ángel Echarte Fernández, David Sanz Bas, Cristina Pérez Pérez
ABSTRACT The objective of this article is to analyze the two most important monetary laws that have been implemented in El Salvador, namely the Monetary Integration Law (MIL) and the Bitcoin Law. The most important articles of both laws will be analyzed, as well as the consequences of dollarization, and the possible advantages and risks associated with the adoption of Bitcoin as legal tender. Although this measure may have some positive aspects by encouraging financial innovation and facilitating remittances, the macroeconomic risk is very high due to the volatility of this cryptocurrency. So far no positive results have been achieved as the acceptance has been very low and there has been a depreciation of the asset in recent months.
In this paper, we analyze the decentralization features of Central Bank Digital Currencies (CBDCs) and evaluate the limitations of Distributed Ledger Technology (DLT) benefits in this context. Our research explores the essential characteristics of consensus algorithms, including security, finality, and efficiency, for CBDCs and considers the trade-off between transaction throughput and decentralization. After examining various options, we conclude that Proof of Work (PoW) and Proof of Stake (PoS) are unsuitable for CBDCs. However, Proof of Authority (PoA), Delegated Proof of Stake (DPoS), and Notary Services are promising alternatives. Our findings reveal that while CBDCs possess some decentralization components in their architecture, they still maintain political and logical centralization due to regulation by the Central Bank. Consequently, CBDCs can only partially leverage all the benefits of DLT, such as the ability to withstand challenges, which still depend on the Central Bank as the sole point of failure. This paper aims to equip policymakers with valuable insights to make informed decisions regarding the design of CBDC consensus algorithms.
Nir Chemaya, Lin William Cong, Emma Joergensen, Dingyue Liu · 5 authors
Decentralized Finance (DeFi) is revolutionizing traditional financial services by enabling direct, intermediary-free transactions, thereby generating a substantial volume of open-source transaction data. This evolving DeFi landscape is particularly influenced by the emergence of Layer 2 (L2) solutions, which are poised to enhance network efficiency and scalability significantly, surpassing the existing capabilities of Layer 1 (L1) infrastructures. However, the detailed impact of these L2 solutions has been somewhat obscured due to a dearth of transaction data indices that can provide in-depth economic insights for empirical research. This study seeks to address this critical gap by conducting a comprehensive analysis of raw transactions sourced from Uniswap, a central decentralized exchange (DEX) within the DeFi ecosystem. The dataset encompasses an extensive collection of over 50 million transactions from both L1 and L2 networks. Additionally, we have curated a wide-ranging repository of daily indices derived from transaction trading data across prominent blockchain networks, including Ethereum, Optimism, Arbitrum, and Polygon. These indices shed light on crucial network dynamics, such as adoption trends, evaluations of scalability, decentralization metrics, wealth distribution patterns, and other key aspects of the DeFi landscape. This rich dataset serves as an invaluable tool, enabling researchers to dissect the complex interplay between DeFi and Layer 2 solutions, thus enhancing our collective understanding of this rapidly evolving ecosystem. Its notable contribution to the data science pipeline includes the implementation of a flexible, open-source Python framework, enabling the dynamic calculation of decentralization indices, customizable to specific research requirements. This adaptability makes the dataset particularly suitable for advanced machine learning applications, including deep learning, thereby solidifying its role as a critical asset in shaping Blockchain as the foundational infrastructure for the intelligent Web3 ecosystem.
Nir Chemaya, Lin William Cong, Emma Jorgensen, Dingyue Liu · 5 authors
Decentralized Finance (DeFi) is reshaping traditional finance by enabling direct transactions without intermediaries, creating a rich source of open financial data. Layer 2 (L2) solutions are emerging to enhance the scalability and efficiency of the DeFi ecosystem, surpassing Layer 1 (L1) systems. However, the impact of L2 solutions is still underexplored, mainly due to the lack of comprehensive transaction data indices for economic analysis. This study bridges that gap by analyzing over 50 million transactions from Uniswap, a major decentralized exchange, across both L1 and L2 networks. We created a set of daily indices from blockchain data on Ethereum, Optimism, Arbitrum, and Polygon, offering insights into DeFi adoption, scalability, decentralization, and wealth distribution. Additionally, we developed an open-source Python framework for calculating decentralization indices, making this dataset highly useful for advanced machine learning research. Our work provides valuable resources for data scientists and contributes to the growth of the intelligent Web3 ecosystem.
In recent years, the decentralized finance (DeFi) sector has witnessed exponential growth, fundamentally altering financial transactions through the innovative application of blockchain technology, which facilitates decentralized operations such as borrowing, lending, and trading on autonomous protocols. Our study seeks to deepen the understanding of lending protocols, a cornerstone in the DeFi ecosystem, by unraveling their complexities and identifying potential risks, alongside proposing mitigation strategies. We introduce a method to obtain and manage on-chain data from decentralized lending protocols, enhancing the transparency and facilitating intuitive data analysis for users. Furthermore, we propose two novel metrics to calculate the leverage of lending protocols, aiming to equip users with critical insights for informed decision-making, thereby fostering a safer and more efficient DeFi ecosystem.
Purpose This study provides a comprehensive analysis of the potential contagion of Bitcoin on financial markets and sheds light on the complex interplay between technological advancements, accounting regulatory and financial market stability. Design/methodology/approach The study employs a multi-faceted approach to analyze the impact of BTC systemic risk, technological factors and regulatory variables on Asia–Pacific financial markets. Initially, a single-index model is used to estimate the systematic risk of BTC to financial markets. The study then uses ordinary least squares (OLS) to assess the potential impact of systemic risk, technological factors and regulatory variables on financial markets. To further control for time-varying factors common to all countries, a fixed effect (FE) panel data analysis is implemented. Additionally, a multinomial logistic regression model is utilized to evaluate the presence of contagion. Findings Results indicate that Bitcoin's systemic risk to the Asia–Pacific financial markets is relatively weak. Furthermore, technological advancements and international accounting standard adoption appear to indirectly stabilize these markets. The degree of contagion is also found to be stronger in foreign currencies (FX) than in stock index (INDEX) markets. Research limitations/implications This study has several limitations that should be considered when interpreting the study findings. First, the definition of financial contagion is not universally accepted, and the study results are based on the specific definition and methodology. Second, the matching of daily financial market and BTC data with annual technological and regulatory variable data may have limited the strength of the study findings. However, the authors’ use of both parametric and nonparametric methods provides insights that may inspire further research into cryptocurrency markets and financial contagions. Practical implications Based on the authors analysis, they suggest that financial market regulators prioritize the development and adoption of new technologies and international accounting standard practices, rather than focusing solely on the potential risks associated with cryptocurrencies. While a cryptocurrency crash could harm individual investors, it is unlikely to pose a significant threat to the overall financial system. Originality/value To the best of the authors knowledge, they have not found an asset pricing approach to assess a possible contagion. The authors have developed a new method to evaluate whether there is a contagion from BTC to financial markets. A simple but intuitive asset pricing method to evaluate a systematic risk from a factor is a single index model. The single index model has been extensively used in stock markets but has not been used to evaluate the systemic risk potentials of cryptocurrencies. The authors followed Morck et al. (2000) and Durnev et al . (2004) to assess whether there is a systemic risk from BTC to financial markets. If the BTC possesses a systematic risk, the explanatory power of the BTC index model should be high. Therefore, the first implied contribution is to re-evaluate the findings from Aslanidis et al. (2019), Dahir et al . (2019) and Handika et al . (2019), using a different method.
This chapter explores the evolution of financial engineering and its implications for the future. Financial engineering plays a crucial role in shaping the financial industry by developing innovative solutions and managing risks. Understanding its historical development, advances, challenges, and future prospects is essential for practitioners, policymakers, and researchers. The methodology employed in this study consists of a comprehensive literature review and secondary data analysis. Academic papers, industry reports, books, and reputable online sources were reviewed to gather relevant information. Data analysis involved qualitative and quantitative techniques to extract insights from the literature and empirical studies. The paper discusses the origins of financial engineering, highlighting the early milestones of the Black-Scholes-Merton model and the subsequent growth of the derivatives market. It examines the impact of securitization and structured finance on financial engineering practices. Furthermore, it explores the advances in technology, such as computing power and data availability, the rise of algorithmic trading and quantitative investing, and the innovations in pricing and valuation models. Lessons from the past, particularly the global financial crisis of 2008, have influenced regulatory reforms and enhanced risk management practices in financial engineering. The importance of transparency and ethical considerations in financial engineering is emphasized. The paper also explores emerging trends, including sustainable finance and the integration of environmental, social, and governance (ESG) factors, cyber security and risk management, algorithmic trading and quantitative investing, as well as digital assets and decentralized finance (DeFi).Financial engineering continues to evolve in response to technological advancements, regulatory reforms, and emerging trends. Integrating artificial intelligence and machine learning, addressing the regulatory challenges of digital assets, promoting ethical considerations, and fostering cross-disciplinary collaboration are crucial for the future of financial engineering. This research paper provides valuable insights into the past, present, and future prospects of financial engineering, serving as a foundation for further research in this field.
In international trade and financial exchanges, global cryptocurrencies have a prominent and effective role.In this paper, using the KOF index, the structure of financial globalization is extracted and the effect of the expansion of global cryptocurrencies is examined in the two components: Foreign Direct Investment and Portfolio Investment.The Ordinary Least Squares (OLS) model has been used separately for 2020, 2021, and 2022 to analyze the results of the expansion of global cryptocurrencies in the foreign direct investment component.Also, the price changes of Bitcoin and Ethereum from March 10, 2016, to the end of December 2022 have been used to investigate the effect of global cryptocurrencies in portfolio investment by applying Modern Portfolio Theory (MPT).Also, according to the availability of data in research sources, the data of 111 countries have been used.OLS estimated results suggest that the adoption and expansion of global cryptocurrencies has no significant relationship with Foreign Direct Investment.Also, using MPT, the results of portfolio optimization suggest that global cryptocurrencies improve the effectiveness of the selected portfolios, and with the same corresponding returns, the risk of the portfolios including global cryptocurrencies decreases as well.Therefore, the results emphasize the role of global cryptocurrencies in financial globalization only as crypto-assets.
In order for tokenized asset networks to be accountable as Web3 marketplaces for token-related transactions, identity verification must be conducted by gateways into those token networks. This includes the identity validation and legal status verification of the originators and beneficiaries, the gateway owners/operators, and other relevant service providers. The classic identity provider model could be enhanced to support anti-money laundering regulations, notably the Travel Rule. A privacy-preserving IdP model in combination with a legal service provider is explored where the IdP becomes the issuer of a blinded attestation regarding the user attribute, and where the legal representative with attorney-client privilege becomes the first point of contact for requests for the disclosure of the blinded attestations.
Natkamon Tovanich, Myriam Kassoul, Simon Weidenholzer, Julien Prat
We study financial contagion in Compound V2, a decentralized lending protocol deployed on the Ethereum blockchain. We explain how to construct the balance sheets of Compound's liquidity pools and use our methodology to characterize the financial network. Our analysis reveals that most users either borrow stablecoins or engage in liquidity mining. We then study the robustness of Compound through a series of stress tests, identifying the pools that are most likely to set off a cascade of defaults.
Purpose This study aims to synthesize the existing literature with insights gained from interviews conducted with regulatory experts. The objective is to analyse the challenges associated with incorporating cryptocurrencies into regulatory frameworks and to explore constraints in the regulatory institutionalization of cryptocurrencies. Design/methodology/approach The study methodology consists of two steps. The first step is to identify regulatory constraints in the literature review and in the next step, interviews are conducted with officials of the State Bank of Pakistan (SBP). The study used a qualitative case study methodology, in which a single case (regulatory constraint) was selected as a unit of analysis. Findings The findings show that lack of traceability, legal status, lack of governmental control due to decentralization, difficulty enforcing laws, volatility, lack of skills with regulators and difficulty integrating cryptocurrencies into the current financial system are the main obstacles to the introduction of a regulatory framework. Thus, on a broader conceptual level, the findings can be grouped into opportunism, lack of strategic capability and fragmented global laws. Research limitations/implications This study could inform global cryptocurrency regulation discussions, sharing a developing country’s views on balancing the government, central banks, the financial sector and public interests. This could guide countries to consider cryptocurrency adoption in similar situations. This could affect the cryptocurrency market, impacting demand, supply and investor trust in Pakistan. Practical implications The study has implications for policy making officials. The research aims to offer valuable insights to the SBP and other regulatory authorities, helping them identify potential risks and create an effective regulatory framework for cryptocurrencies. Social implications The study has implications for society in knowing about the volatile nature of cryptos and anonymity of their issuers, which poses regulatory constraints. This then implies its harmfullness to its traders and the huge losses that may arise from their trading due to its volatile nature. Originality/value This study contributes to the literature on the constraints, responsibilities and consultation framework of cryptocurrency regulations.
An important virtue of distributed ledger technologies is their acclaimed higher level of decentralisation compared to traditional financial systems. Empirical literature, however, suggests that many systems tend towards centralisation as well. This study expands the current literature by offering a first-time, data-driven analysis of the degree of decentralisation of the platform Hedera Hashgraph, a public permissioned distributed ledger technology, employing data directly fetched from a network node. The results show a considerably higher amount of released supply compared to the release schedule and a growing number of daily active accounts. Also, Hedera Hashgraph exhibits a high centralisation of wealth and a shrinking core that acts as an intermediary in transactions for the rest of the network. However, the Nakamoto index and Theil index point to recent progress towards a more decentralised network.