This paper studies the benefits of timing Bitcoin returns by upside and downside volatilities. Standard volatility management implicitly treats volatility spikes as signals of adverse states, reducing exposure when total volatility increases. However, in Bitcoin, volatility spikes are frequently due to price rallies, which typically indicate subsequent positive returns. We show that semivolatility timing rules that account for both downside and upside risk concerns yield substantially stronger risk-adjusted performance than buy-and-hold and volatility-managed strategies. This stems from the fact that high upside-driven volatility states in Bitcoin are disproportionately associated with positive returns in the next period.
Existing decentralization measures are almost entirely origination-side, quantifying concentration in who mines or validates blocks. We introduce a spectral methodology measuring concentration on the destination side instead: where value ultimately flows once it leaves a validator wallet. Modeling wallet-to-wallet transfers as a Markov chain, we compute near-real-time steady-state probabilities via the Perron-Frobenius theorem to identify long-run terminal recipients. Applied to 76,855 Ethereum wallets from four years of mining data, fund flows collapse to just four terminal accounts. None of these fund destination accounts are among the network's three dominant identifiable revenue-earning miners.
<b><i>Governance Fork Farming</i></b> is a strategic exploitation pattern in decentralized finance (DeFi) and proof-of-stake (PoS) ecosystems where actors repeatedly engineer, anticipate, or provoke governance forks to extract economic rewards. By positioning capital, validator power, or voting rights ahead of contentious governance events, attackers harvest duplicated assets, incentives, or control advantages across forked states. This threat undermines governance legitimacy and destabilizes network continuity without violating protocol rules.
The article is devoted to analyzing the conceptual and methodological challenges that Decentralized Financial Assets (DFAs) pose to modern economic theory and financial analysis. The author argues that DFAs, possessing properties such as programmability, autonomy, and the network nature of value, do not fit into traditional asset classifications or existing theoretical valuation models. The ontological gap between DFAs as “programmable economic interfaces” and classical financial instruments is emphasized. The paper examines specific DFA risks and mechanisms, such as automated market makers, staking, and Decentralized Autonomous Organizations (DAOs), for which standard analytical methods are inapplicable. The author highlights the necessity of developing new hybrid valuation approaches that combine tokenomics and onchain metrics analysis, as well as adapting portfolio analysis and risk models. In conclusion, the main global regulatory approaches to DFAs are reviewed, with the final argument that their sustainable integration into the financial system requires, first and foremost, a profound rethinking of fundamental economic categories.
Decentralized finance (DeFi) protocols increasingly interface with the United States financial ecosystem while exhibiting structural vulnerabilities related to operational resilience, governance fragmentation, and illicit finance exposure. This paper proposes a structured Operational Risk Governance Framework tailored to decentralized financial platforms, translating established financial-sector internal control and operational risk principles into functionally equivalent governance mechanisms suitable for blockchain-based environments. The framework introduces (i) an operational risk taxonomy adapted to DeFi, (ii) an internal control governance model mapped to COSO and Basel-aligned concepts, and (iii) the ORG-DeFi Model, a scoring methodology that evaluates platforms across governance integrity, technical controls, AML and illicit finance exposure, liquidity and market stability, and transparency and monitoring. A hypothetical lending-protocol case example illustrates application for institutional due diligence, compliance assessment, and research benchmarking. By operationalizing governance indicators that align with U.S. policy priorities on financial stability, market integrity, and illicit finance mitigation, this work provides an implementation-oriented methodology to support responsible innovation and strengthen risk governance in decentralized systems.
In traditional banking, repeated deposit-and-lend cycles let a single dollar of reserves support multiple dollars of claims. Decentralized finance produces an analogous structure with tokens. Constructing a Token Graph of 10,200 tokens across 200 blockchains, this paper maps the resulting hierarchy and shows that, by late 2025, each dollar of base assets supports $4.7 of total claims. An embedded yield correction disentangles two channels that raw data conflates: a compositional channel, where lending protocols concentrate in deeper tiers and mechanically raise average yields; and a liquidity channel, where each derivation step reduces secondary-market depth and depresses yields in liquidity-sensitive pools. The liquidity channel concentrates in DEX pools and vanishes in lending pools. A yield decomposition shows that the tier gradient operates entirely through fundamental protocol yields, not incentive-token emissions; quantile regressions reveal that the structural associations concentrate in the upper tail of the yield distribution, with near-zero effects at the median. These findings reframe DeFi's "double counting" as a structural risk question and identify liquidity fragmentation as the primary mechanism associated with yield variation across the token hierarchy.
Decentralized finance (DeFi) has emerged as a significant financial innovation, using blockchain technology and smart contracts to replicate and expand traditional financial services without intermediaries. This review synthesizes the literature across seven dimensions: token financing, trading and liquidity, cryptocurrency as an asset class, governance, risk, monetary system implications, and infrastructure. We identify several key findings: tokens solve coordination problems but face design trade-offs; cryptocurrency markets exhibit distinct risk factors, yet most price volatility reflects beliefs rather than fundamentals; decentralization is partial and endogenous, with concentration emerging in mining, staking, and governance; novel risks including stablecoin fragility and MEV extraction require new frameworks; and infrastructure constraints shape feasible applications. We conclude by proposing directions for future research.
Hong Kong Institute for Monetary and Financial Research
This paper is written by Evgeny Lyandres (Tel Aviv University) and Alexander Zaidelson (SCRT Labs). This paper performs a comprehensive empirical investigation of liquidity provision into concentrated liquidity (Uniswap V3) pools on the Ethereum blockchain. To examine the performance of liquidity provision strategies and their determinants, we reverse-engineer each liquidity pool’s history and measure every liquidity position’s return. We also decompose each position’s return into components, including core elements—non-concentrated liquidity provision and liquidity concentration. Returns to the core components of liquidity provision are negative on average but are mildly positive within the sample of frequent liquidity providers. Some liquidity providers seem to possess skill, as evidenced by persistence in performance, by learning from past experience, and by associations between several position and liquidity provider characteristics on one hand and performance on the other hand. We compare quantitative and discretionary liquidity provision strategies and their performance and find that quant liquidity providers significantly underperform discretionary ones. This underperformance cannot be fully traded to measurable differences in strategies of the two types of liquidity providers. Successful quant liquidity providers employ strategies that are largely similar to those of successful discretionary liquidity providers.
Decentralized Finance (DeFi) enables financial services to operate without centralized intermediaries, using smart contracts and blockchain consensus to ensure transparency and trust minimization. While DeFi protocols like Aave and MakerDAO use overcollateralization to mitigate credit risk, this approach creates capital inefficiencies and limits access to borrowers lacking on-chain assets. This paper introduces Inverum, a novel DeFi lending protocol designed to support undercollateralized loans for Web3 businesses and Decentralized Autonomous Organizations (DAOs). Inverum integrates on-chain credit scoring via soulbound tokens, decentralized liquidity pools, and governance-driven incentives to enable trustless, reputation-based lending. The protocol offers a fully composable framework for exploring undercollateralized lending without relying on traditional identity or off-chain reputation systems, contributing a research-ready model for future experimentation and protocol design.
The regulation of virtual assets such as cryptocurrencies, stablecoins, Non-Fungible Tokens (NFTs) and Decentralised Finance (DeFi) protocols, represents a contested arena where economic innovation intersects with geopolitical interests, financial stability concerns and ideological debates over sovereignty and globalisation.This article examines the politics underlying virtual assets regulation, tracing global trends shaped by global standard setters such as the Financial Action Task Force (FATF), Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO), while analysing national responses in key jurisdictions such as the United States, the European Union, China, India, the United Kingdom, Japan.The article also highlights regulatory development and responses in Ghana and Nigeria.Drawing on regulatory capture theory and comparative political economy, it argues that virtual assets regulation is not merely a technical exercise, but a politicised process influenced by lobbying, electoral dynamics and international power asymmetries.Global harmonisation efforts coexist with regulatory fragmentation, posing challenges for cross-border compliance and innovation.The analysis highlights implications for global financial governance and proposes pathways for more equitable regulatory frameworks.
The cryptocurrency market, characterized by high volatility, has evolved into a significant financial asset class, attracting both retail and institutional investors. Understanding its interconnectedness with macroeconomic factors is crucial for risk management and financial stability. This study empirically analyzes the dynamic relationships between two primary crypto assets, Bitcoin (BTC) and Ethereum (ETH), and the monetary policy shifts of the U.S. Federal Reserve (The Fed). Using a Vector Autoregression (VAR) model on daily time-series data from January 1, 2022, to June 16, 2025, this research investigates the short-term dynamics, Granger causality, and shock transmissions within this system. The findings reveal a significant one-way causal relationship from The Fed's interest rate changes to both Bitcoin and Ethereum returns, challenging the weak-form Efficient Market Hypothesis. Furthermore, Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analyses provide robust evidence of Bitcoin's market leadership, with shocks in Bitcoin explaining nearly 70% of the variance in Ethereum's movements. These results highlight a clear hierarchical structure: The Fed influences broad market sentiment, while Bitcoin leads internal market dynamics, offering critical insights for investors and policymakers navigating the digital asset ecosystem.
Africa's monetary and financial system, which is currently developing dynamically after a prolonged period of neocolonial dependence on transnational financial groups and international capital, is following its own unique path of development, one that differs significantly from the financial trajectories of other global regions. Sub-Saharan Africa, in particular, showcases a unique experience in the evolution of its monetary system, characterized by the world's highest growth dynamics in fintech and electronic non-bank payments. The active, extensive development of Pan-African financial groups and the trend of them displacing foreign and transnational financial corporations from the African continent are intensifying each year. Africa is one of the global leaders in the development of decentralized finance and cryptocurrency mining. At the same time, the continent remains burdened with high levels of external public debt, accumulated primarily in the post-colonial period of its history. This debt hinders the economic development of African nations and their achievement of the Sustainable Development Goals. Concurrently, the scientific and political discourse on reforming the global financial architecture is becoming increasingly acute, as the current system in its present form is incapable of effectively countering new challenges, which have further exacerbated the problems accumulated over recent decades. Africa stands to be a primary beneficiary of a reform of the global monetary and financial system, within which it must assume an adequate position commensurate with its growing international role that reflects its deserving status in geopolitical and geo-economic terms. Sub-Saharan Africa has the potential to become the trigger that accelerates the reform of the global financial architecture and to serve as a unique testing ground for corresponding pilot projects.
Decentralized Finance (DeFi) is not merely a new competing technology as it challenges the core principle of traditional banking by eliminating the bank's role as an intermediary in financial services. This thesis establishes a foundation by examining DeFi technology and analyzing the specific areas of banking where its disruptive impact is most significant. Through a literature review and case examples, the study examines the strategic responses traditional banks have developed to address the disruption caused by DeFi technology. The research indicates that the threat of banks being displaced is unfounded; rather, the most likely scenario is strategic adaptation. Banks have responded to the DeFi challenge in various ways, including developing their own private blockchain-based platforms and tokenizing assets (Real-World Asset tokenization). Meanwhile, central banks have begun researching and developing the launch of Central Bank Digital Currencies (CBDCs). Additionally, regulatory authorities have responded to DeFi disruption by tightening the associated regulatory environment. The thesis concludes that banks are not competing directly with open DeFi; instead, they are integrating its technological benefits, such as automation and efficiency, into their regulated operations. The future financial system appears as a model of coexistence that combines the technological innovation of DeFi with the institutional trust of banks.
High-value payment transactions (HVTs) face heightened exposure to money laundering risks due to their large monetary volumes, cross-jurisdictional nature, and the increasing complexity of financial networks. Traditional Anti-Money Laundering (AML) procedures rely heavily on sharing customer identities, transactional attributes, and risk-model outputs across institutions and regulators—creating substantial privacy, security, and data-handling risks. Zero-Knowledge Proofs (ZKPs) offer a transformative alternative by enabling financial institutions to prove compliance with AML requirements without revealing the underlying sensitive information. This paper examines the design and application of ZKP-based compliance frameworks for HVT ecosystems, detailing how AML checks—including KYC verification, sanctions screening, transaction-amount threshold validation, behavioral-risk scoring, and source-of-funds assessment—can be cryptographically attested through privacy-preserving proofs. We propose a hybrid architecture that combines off-chain AML computation with an on-chain ZKP verification and audit layer supported by secure regulatory nodes. Through structured workflows and proof types such as range proofs, list membership proofs, and rule-compliance circuits, the model ensures regulatory oversight while maintaining strict confidentiality. The study also evaluates the performance implications of ZKP systems in high-volume transaction environments and addresses security, interoperability, and oracle-reliability concerns. Ultimately, ZKP-enabled AML frameworks demonstrate significant potential to enhance compliance efficiency, reduce data-exposure risk, and strengthen trust across global payment networks. The paper concludes by outlining future research opportunities, including AI-driven AML circuits, cross-border ZKP interoperability standards, and integration with decentralized identity solutions.
Mohammad Sharif Karimi, Omar Esqueda, Naveen Mahasen Weerasinghe
This study employs a quantile-on-quantile connectedness approach to analyze the asymmetric, distribution-dependent, and time-varying spillovers between FinTech indices and traditional financial markets. The results show that spillovers are concentrated in the distribution tails, with FinTech indices exhibiting strong co-movements with equities and Bitcoin under extreme conditions, while linkages with U.S. Treasury bonds are weaker and often inverse. Net connectedness analysis reveals that the S&P 500 and Bitcoin act as the primary transmitters of shocks into FinTech indices, whereas Treasuries generally serve as receivers, except during stress episodes when safe-haven flows or heightened credit risk reverse the direction of spillovers. The dynamic ∆TCI (Difference between the total direct connectedness and the reverse total connectedness) further demonstrates that FinTech indices serve as net transmitters in stable markets but become receivers during crises such as the COVID-19 pandemic, the Federal Reserve’s tightening cycle of 2022–2023, and the FTX-driven crypto collapse. Segmental heterogeneity is also evident: distributed ledger firms are highly sensitive to cryptocurrency dynamics, alternative finance providers respond strongly to both equity and bond markets, and digital payments firms are primarily influenced by equity spillovers. Overall, the findings underscore FinTech’s dual role—transmitting shocks during tranquil periods but amplifying systemic vulnerabilities during crises. For investors, diversification benefits are state-dependent and largely disappear under adverse conditions. For regulators and policymakers, the results highlight the systemic importance of FinTech–equity and crypto–ledger linkages and the need to integrate FinTech exposures into macroprudential surveillance to contain volatility spillovers and safeguard financial stability.
As cryptocurrency prices continue to recover, crypto crimes such as money laundering are becoming increasingly rampant. Mixing services such as Tornado Cash have become the primary tools for obfuscating illegal financial transactions due to their inherent anonymity mechanisms. Tornado Cash is a non-custodial, smart contract-based mixing service (SC-CMS) that breaks the direct mapping between deposit and withdrawal accounts, hindering regulators from tracking illicit fund flows. Existing deanonymization methods for Tornado Cash suffer from several challenges, including vague theoretical concepts, evolving mixing mechanisms, and insufficient labeled samples. To address these concerns, this paper proposes the first formal concept of SC-CMS to facilitate and evaluate the deanonymization efforts systematically. We design a novel linkability attack, LASC, based on enhanced graph structure learning, to associate mixing accounts on Tornado Cash and mathematically prove its feasibility. Comprehensive experiments on real Ethereum transactions demonstrate that LASC outperforms state-of-the-art works in both performance and efficiency.
Blockchain-based decentralized finance (DeFi) is a major financial innovation, enabling transparency and inclusion through programmable rails. The transition to DeFi 3.0 defined by cross-chain interoperability, multichain ecosystems, and tokenized real-world assets (RWAs) broadens functionality yet introduces potential systemic vulnerabilities. Prior research often treats protocol exploits or single risk families in isolation, leaving no unified lens connecting DeFi risks to financial resilience. This study develops a unified DeFi 3.0 risk taxonomy and maps it to resilience capacities. Using a three-lane systematic literature review (peer-reviewed, grey literature, preprints; 2021-2025; 43 sources), we identify twelve risk domains in three categories: technology and data infrastructure; market and economic; and governance, legal, and operational. We then assess resilience along three capacities absorptive (stablecoins, automated market makers/AMMs, insurance), adaptive (regulatory alignment, RWA tokenization, AI integration), and transformative (transparency, inclusion, ESG alignment). The resulting framework operationalizes resilience theory via this taxonomy, providing a structured reference for regulators, developers, and scholars to support innovation while strengthening systemic stability.
Stablecoins are crypto-assets designed to maintain a stable value against a reference asset, typically the U.S. Dollar. The peg to the dollar is supported by the assets that back the stablecoin. Stablecoins perform dollar-like functions in decentralized finance (DeFi) and represent a run-able liability for their issuers.
Decentralized Finance (DeFi) faces a "Capital Inefficiency Trilemma," relying on overcollateralization due to a lack of off-chain financial identity. This paper introduces Zolvency, the Zero-Knowledge Solvency Layer—a cryptographic infrastructure bridging this gap. By utilizing zkTLS for authenticated data extraction from Web2 sources (e.g., tax portals, banking apps) and zkVMs (SP1) for verifiable computation, Zolvency issues privacy-preserving Soulbound Tokens (SBTs) that attest to financial solvency. This enables under-collateralized lending for Real World Assets (RWA) in emerging markets, unlocking liquidity while preserving user privacy and data sovereignty.