Oracles are software components that enable data exchange between siloed blockchains and external environments, enhancing smart contract capabilities and platform interoperability.Oracles play key roles in decentralized finance and blockchain applications in centralized finance.We find that integration into decentralized oracle networks is positively associated with key measures of economic activity such as Total Value Locked, triggered by positive network effects in adoption and usage.Our study reveals symbiotic gains from enhanced interoperability and network effects across protocols on a given chain and among integrated chains.Oracle integration appears to improve risk-sharing and mitigates contagion, increasing resilience during turbulent periods in crypto markets.Overall, oracles emerge as a crucial component to enable informational and economic integration in decentralized finance ecosystems.
Central banks may shift their international reserve holdings in order to protect themselves ex-ante against the risk of financial sanctions by fiat reserve currency issuers. For example, from 2016 to 2021, countries facing a higher risk of US sanctions increased the gold share of their reserves more than countries facing a lower risk of US sanctions. This paper explores the potential for Bitcoin to serve as an alternative hedging asset. I describe a dynamic Bayesian copula model to simulate the joint returns of Bitcoin and other reserve assets under a wide range of plausible sanctions probabilities, quantifying the extent to which varying levels of sanctions risk increase optimal gold, renminbi, and Bitcoin allocations. I conclude that sanctions risk may diminish the appeal of US Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of both cryptocurrency and gold. • The paper simulates the returns of Bitcoin and other reserve assets. • The simulations balance expected return, volatility, and sanctions risk. • In the presence of sanctions, there is no completely safe asset. • The model shows that cryptocurrency can act as a form of insurance. • Sanctions risk may propel broader diversification in central bank reserves.
Pietro Saggese, Esther Segalla, Michael Sigmund, Burkhard Raunig · 6 authors
Entities like centralized cryptocurrency exchanges fall under the business category of virtual asset service providers (VASPs). As any other enterprise, they can become insolvent. VASPs enable the exchange, custody, and transfer of cryptoassets organized in wallets across distributed ledger technologies (DLTs). Despite the public availability of DLT transactions, the cryptoasset holdings of VASPs are not yet subject to systematic auditing procedures. In this paper, we propose an approach to assess the solvency of a VASP by cross-referencing data from three distinct sources: cryptoasset wallets, balance sheets from the commercial register, and data from supervisory entities. We investigate 24 VASPs registered with the Financial Market Authority in Austria and provide regulatory data insights such as who are the customers and where do they come from. Their yearly incoming and outgoing transaction volume amount to 2 billion EUR for around 1.8 million users. We describe what financial services they provide and find that they are most similar to traditional intermediaries such as brokers, money exchanges, and funds, rather than banks. Next, we empirically measure DLT transaction flows of four VASPs and compare their cryptoasset holdings to balance sheet entries. Data are consistent for two VASPs only. This enables us to identify gaps in the data collection and propose strategies to address them. We remark that any entity in charge of auditing requires proof that a VASP actually controls the funds associated with its on-chain wallets. It is also important to report fiat and cryptoasset and liability positions broken down by asset types at a reasonable frequency.
Michael Weber, Stephen Sheflin, Olivier Coibion, Yuriy Gorodnichenko
Using repeated large-scale surveys of U.S. households, we study the cryptocurrency investment decisions and motives of households relative to other financial assets.Cryptocurrency holders tend to be young, white, male and more libertarian relative to non-crypto holders.They expect much higher rates of returns for crypto and perceive it as relatively safer than do other households.They also view it as a better hedge against inflation.For those holding cryptocurrencies, changes in Bitcoin prices translate into their purchases of durable goods.Finally, exogenously-provided information about historical returns of cryptocurrencies leads individuals to increase their desired crypto holdings and makes them more likely to actually purchase cryptocurrency subsequently.We compare these views and behaviors to those of households toward other financial assets and argue that cryptocurrency is unique in many of these respects.
The long-lasting intermediated structure of international bond markets has come under scrutiny in recent times because of the risks it exposes final investors to, mostly in relation to the difficulties these investors face in enforcing their rights. Distributed ledger technologies (DLTs) have emerged as a strong contender in efforts to improve the position of final investors by shifting the market to a direct holding structure. In this context, it is necessary to ask if organising international bond markets under a DLT-based direct holding structure will effectively address the risks surrounding intermediated securities. Furthermore, it is important to assess the impact such a change is likely to have on other players in the market (including intermediaries and issuers), as well as on the financial system as a whole. With these questions in mind, this article begins with an explanation of the primary legal implication of holding intermediated securities, i.e., that final investors do not hold legal title over the bonds they have invested in because they are not engaged in a direct relationship with the issuer. The paper then proceeds to dissect the risks such arrangements expose investors to and contrast those risks with the benefits that intermediation afford to investors, issuers and the financial system in general. It is then argued that DLTs are not only inadequate to the task of addressing those risks, but would also eliminate most of the advantages of intermediation. The paper goes on to examine how investors and issuers are not incentivised to promote the development of a DLT-based bond market organised under a direct holding structure. It concludes with the suggestion that a better way to improve the position of final investors in bond markets is to explore how DLTs may enhance the benefits already created by intermediation, rather than relying on these technologies to eliminate intermediation altogether. In particular, it is submitted that DLTs may introduce efficiencies in the management of the bonds, the performance of obligations by issuers, the settlement process, the performance of securities financing transactions, and the provision of services by intermediaries.
Imagine you would be able to take out a loan without having to speak to anyone and even without having a bank account. Also imagine getting an interest of several percentage points on your savings without needing a bank. This is possible in the world of decentralized finance. In this chapter I’m going to take you through the concept of decentralized finance, its future perspective, and how it relates to the traditional world of finance. I’m devoting a chapter to this subject because I think this concept could disrupt our lives in a major way over the coming years.
This paper aims to analyse the literature on distributed ledger technology (DLT) and blockchain in the banking and financial industry. The use of these technologies has extended beyond the creation of private cryptocurrencies, and they are implemented in numerous areas. The methodology employed in this study consists in the review of the most relevant literature by focusing on theoretical and empirical studies as well as on the guidelines and surveys performed by national and international banking and financial authorities. This paper shows that the most promising uses of DLT in finance include: 1) application for specific banking activities; 2) application to improve the functioning of the supply chain finance; 3) creation of central bank digital currencies (CBDCs). Lastly, this paper detects avenues for future research in this field, which include the design of CBDCs, identification of the determinants of adoption of DLT, the use of the interventionist research to investigate into the organisational challenges of blockchain implementation in the banking industry. We contribute to the literature by providing a non-automated literature review and proposing a research agenda to advance our knowledge about the use of this technology in banking and finance.
Since the Merge update upon which Ethereum transitioned to Proof of Stake, it has been touted that it resulted in lower power consumption and increased security. However, even if that is the case, can this state be sustained? In this paper, we focus on the potential impact of competition with other smart contract platforms on the price of Ethereum's native currency, Ether (ETH), thereby raising questions about the safety and sustainability purportedly brought about by the design of Proof of Stake.
As one of the most popular blockchain platforms supporting smart contracts, Ethereum has caught the interest of both investors and criminals. Differently from traditional financial scenarios, executing Know Your Customer verification on Ethereum is rather difficult due to the pseudonymous nature of the blockchain. Fortunately, as the transaction records stored in the Ethereum blockchain are publicly accessible, we can understand the behavior of accounts or detect illicit activities via transaction mining. Existing risk control techniques have primarily been developed from the perspectives of de-anonymizing address clustering and illicit account classification. However, these techniques cannot be used to ascertain the potential risks for all accounts and are limited by specific heuristic strategies or insufficient label information. These constraints motivate us to seek an effective rating method for quantifying the spread of risk in a transaction network. To the best of our knowledge, we are the first to address the problem of account risk rating on Ethereum by proposing a novel model called RiskProp, which includes a de-anonymous score to measure transaction anonymity and a network propagation mechanism to formulate the relationships between accounts and transactions. We demonstrate the effectiveness of RiskProp in overcoming the limitations of existing models by conducting experiments on real-world datasets from Ethereum. Through case studies on the detected high-risk accounts, we demonstrate that the risk assessment by RiskProp can be used to provide warnings for investors and protect them from possible financial losses, and the superior performance of risk score-based account classification experiments further verifies the effectiveness of our rating method.
Decentralized finance (DeFi) transactions are typically executed using a special digital class of contracts called smart contracts. These contracts are self-executing and hardcoded directly on a blockchain. We observe the emergence of a new class of voluntary audits that evaluate the integrity of these contracts. Using a hand-coded sample of about 8,500 smart contract audit reports, we provide some of the first evidence showing that (1) these audits are pervasive, (2) the audit firm market is predominantly composed of new technical audit firms, (3) the scope of these audits can span a variety of contract features, (4) the audit inputs and outputs differ substantively from those of conventional financial audits, and (5) the market reacts positively to the release of these audit reports, suggesting that these reports are value-relevant. These findings highlight the demand for novel assurance services driven by blockchain technology.
Decentralized Finance (DeFi) is gaining momentum in India, showcasing both the current state and future potential of this transformative financial ecosystem. In terms of the current state, several DeFi projects and initiatives have emerged, aiming to address financial inclusion and streamline traditional financial processes. These projects include decentralized lending platforms, decentralized exchanges, and yield farming protocols. While the adoption of DeFi is still in its early stages in India, there is a growing interest among individuals and institutions to explore the possibilities offered by this technology. Looking ahead, the future potential of DeFi in India is immense. With a large unbanked and underbanked population, DeFi can bridge the gap by providing access to financial services, such as loans, savings, and investments, directly to individuals without the need for intermediaries. Additionally, DeFi can empower small businesses and startups by enabling peer-to-peer lending and innovative fundraising models.
Decentralized finance (DeFi) is a novel financial model, that uses the distributed ledger technology. It aims to offer financial services such as trading, investing, peer-to-peer borrowing and lending, access to fiat currencies, transfer of money globally, and managing insurance and credit services. Further, these services are offered without relying upon intermediaries like banks or other financial institutions. This leads to, both lower costs and entry barriers. On the other hand, as of today, there is no safety net for such activities. Therefore, its benefits should be balanced with its associated risks.