Decentralized Finance (DeFi) is a new financial infrastructure with applications similar to traditional financial products, such as exchange, lending, derivatives, and asset management. This paper empirically investigates Yearn finance, one of the fastest-growing and largest in DeFi yield aggregator protocols for on-chain asset management, to demonstrate the flow-performance relationship and compare it with mutual funds in traditional finance. According to the findings, there is a positive non-linear relationship between fund flows and recent performance for using stablecoin deposited. In contrast, we cannot find this relationship for using cryptocurrency.�Then, we look further into stablecoin holder behaviour and our findings show that, on average, they prefer the leverage strategy, which offers a chance of higher returns. Finally, we examine the event study of internal and external changes to see how investors respond. For the internal changes, the publication of deploying new strategies for both stablecoin and cryptocurrency vault does not affect investors' immediate reaction. However, only stablecoin holders have directly responded to protocol partners' announcement of the partnership�with Yearn finance for external changes.
Abstract Financial regulation has changed significantly in the 10 years since the global financial crisis. Tougher, more detailed and more complex standards now apply to all aspects of regulation. In more recent times that regulation has been increasingly influenced by the widespread deployment of fintech introducing new services and applications whilst transforming how consumers interact with the more traditional existing banking services. This chapter introduces the context and focus of this most recent regulatory and supervisory authorities and highlights some of the key regulatory initiatives, existing and ongoing, designed to manage the key risks posed by the disruptive nature of the rapid digital transformation occurring in the sector. Technologies designed to sup-port aspects of these regulations are highlighted as part of practical guidance to support innovators in the sector and for those in the sector considering developing or deploying the increasing plethora of new applications utilizing emerging technologies like AI or distributed ledger technologies.
Abstract Changing patterns of risk aversion may follow a non-linear counter-cyclical process. However, the evidence so far has not considered developing cryptocurrency markets. Given some unique features of cryptocurrencies, it is interesting to distinguish how these assets differ from traditional products. This paper investigates the time effects of periodicity on risk aversion for a selection of major cryptocurrencies compared to major financial assets. Significant periodic time-varying patterns are identified when analysing risk aversion. Further, bilateral and bidirectional Granger causalities are identified within cryptocurrencies, as well as between cryptocurrencies and traditional financial assets. Bitcoin is identified as a leading information transmitter of the spillover of risk aversion upon other cryptocurrencies, while estimated risk aversion of traditional financial markets plays a dominant role in the spillover processes upon the cryptocurrency cluster. The latter finding presents further evidence of developing cryptocurrency market maturity. The COVID-19 pandemic is found to have significantly influenced the connectedness of risk aversion among cryptocurrency and traditional financial markets.
The present research aims to analyze the legal relations that arise in the process of tokenization of real assets and their creation as a record certifying ownership in a blockchain network. The peculiarities of using non fungible tokens in the tokenization process and the legal issues raised by the tokenization process itself are discussed. The advantages and disadvantages of the technology at the current stage of the research are indicated and suggestions are given to overcome them.
The avatar of currency has evolved over time, and 'cryptocurrency' is its latest incarnation. Cryptocurrency is a type of digital currency that allows peer-to-peer online payments without interference of financial institutions. Though experts are impressed with its growth trajectory, its decentralized and unregulated structure has stirred insecurity amongst governments across jurisdictions that has translated into bans and indecisiveness related to its status. While the concerns are not baseless and it is susceptible to cybercrimes, the focus must be to mitigate the issues rather than imposing a blanket prohibition that would be antithetical to the fundamental spirit and purpose of financial digitization, which is to promote the free flow of funds. In this chapter, the authors, firstly, analyze the practicality of cryptocurrency in light of the legal barriers and, secondly, assess the viability of a regulatory framework that ensures minimal control from the authorities but also checks concerns including cybercrime, illegal transactions, tax evasion, and lack of accountability.
In this paper, I introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDCs and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDCs are introduced as a payment and saving instrument. I find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is highly important for emerging markets. Moreover, I uncover that CBDCs can generate welfare gains but the gain varies with their designs.
Hisham Farag, Di Luo, Larisa Yarovaya, Damian Zięba
We examine the liquidity provision premium in cryptocurrency markets using the returns from the short reversal strategy. We show that returns from liquidity provision can be predicted using the volatility index, realized variance, risk aversion, crash risk, tail risk, and innovations of Tether liquidity. We also find that<br/>an increase in the liquidity provision premium is associated with a decline in liquidity, trading volume, and transaction count, as well as more withdrawals, higher fees, and greater impermanent loss on Uniswap.<br/>This suggests potential competition between centralized and decentralized exchanges. Further, the liquidity provision premium of stock markets in China and Japan positively predicts the premium of cryptocurrency markets (effect of a common shock), meanwhile that of stock markets in the US and Canada negatively predicts the premium of cryptocurrency markets (substitution effect).