The study explores the impact of non-fungible tokens on asset liquidity within the decentralized finance system, based on a systematic review of thirty articles retrieved from major scholarly databases. We analyzed how NFTs contribute to increasing liquidity and facilitate a shift in digital asset ownership. Findings show NFTs improve asset liquidity by permitting fractional ownership and trade of assets that were previously illiquid, like real estate and digital art. NFTsâ unique characteristics and market volatility may make them less liquid. Blockchain technology that underpins NFTs offers transparent and unchangeable ownership records. The ramifications show how developers, investors, and regulators may take advantage of NFTsâ while resolving obstacles, including scalability problems and regulatory uncertainty.
MakerDAO is a decentralized lending protocol providing crypto-backed loans with no intermediaries, backed by volatile assets such as Ethereum (ETH). Loans are liquidated if the value of the collateral dips below a threshold. DeFi compared to traditional finance does not have standardized risk models and default is difficult to model. Earlier models such as Poisson Process and Brownian Motion have the unrealistic premise of constant volatility, which makes them less useful in rapidly fluctuating crypto markets. This paper introduces a Geometric Brownian Motion (GBM) model with rolling volatility to capture real-time market dynamics. The model learns to adapt to prevailing price trends by estimating volatility with a rolling window and enhances the accuracy of default risk estimation. Results indicate that rolling volatility increases the predictive ability of GBM, providing a robust solution to credit risk management in DeFi platforms. The GBM with rolling volatility has 0.006 root mean square error and 0.008 mean absolute error.
Artificial intelligence (AI) is altering the systemic risk topology of decentralized finance (DeFi). While prior studies examine vulnerabilities in each domain, their intersection remains undertheorized. This paper frames the AI-DeFi ecosystem as a complex adaptive system (CAS) to identify three mechanisms by which AI reshapes systemic risk: algorithmic homogeneity, which synchronizes agent responses; dynamic network rewiring, which amplifies structural fragility; and emergent multi-agent behavior, which produces contagion without centralized intent. Together, these forces introduce endogenous, path-dependent failure modes opaque to reductionist analysis. This framework provides a foundation for empirical analysis and anticipatory governance in AI-mediated financial systems.
This paper investigates the strategic role of Central Bank Digital Currencies (CBDCs) in transforming Africa's financial landscape. It argues that a blockchain-based architecture is a critical tool for addressing two of the continent's most pressing economic challenges: inefficient cross-border payments and the erosion of monetary sovereignty from stablecoin adoption. The analysis moves beyond a domestic retail CBDC model to propose a "Pan-African Payment CBDC Network." This framework leverages a permissioned distributed ledger (DLT) to enable instant, low-cost, and transparent multi-currency settlements, directly supporting the goals of the African Continental Free Trade Area (AfCFTA). The paper further details how a sovereign digital currency can defend monetary policy by providing a safe digital alternative to stablecoins, improving policy transmission, and reinforcing the national currency as the primary unit of account. Finally, it critically examines the implementation challengesâincluding financial disintermediation, technical infrastructure, and political coordinationâand offers a phased, collaborative roadmap for achieving regional economic resilience and sovereignty through digital currency innovation.
This paper surveys the growing empirical literature on decentralized finance (DeFi), emphasizing how protocol design and incentive structures shape economic outcomes in blockchain-based financial systems. We review evidence on tokens, decentralized exchanges, lending platforms, yield farming, derivatives, governance, infrastructure, and regulation. Across these domains, research highlights mechanisms of liquidity provision, price discovery, leverage, systemic fragility, and investor behavior, as well as vulnerabilities stemming from arbitrage frictions, liquidation dynamics, and maximal extractable value. We also examine the roles of audits, oracle networks, settlement mechanisms, and transparency tools in substituting for traditional oversight. The findings indicate that DeFi replicates many functions of traditional finance while introducing new risks linked to pseudonymity, smart contracts, and composability. The survey concludes by outlining open questions for research and policy on market efficiency, governance, systemic risk, and long-term sustainability.
This study investigates the structural transformation of financial intermediation in the context of decentralized finance (DeFi).Building on canonical theories of intermediation, it reframes traditional credit institutions as epistemic architectures, systems that define, validate, and circulate truth about economic behavior.The paper introduces the DeFi Intermediation Matrix (DIM), a conceptual framework that maps the functional equivalence between institutional and protocol-based mechanisms of trust, including risk screening, liquidity transformation, diversification, and compliance.It demonstrates how blockchain architectures redistribute informational power by substituting trust by institution with trust by design, turning verification from a delegated process into a transparent, auditable function.Through this analytical lens, decentralized finance emerges not as a technological disruption but as an epistemological shift: the evolution of finance from a model of delegated expertise to one of reflexive governance.The work concludes that the future of credit systems depends on designing architectures capable of balancing automation and interpretation, ensuring that transparency does not replace judgment, but sustains it.
Two parallel but potentially opposing forces in the financial landscape: the worldwide development of central bank digital currencies (CBDCs) and rapid development of privately offered tokenized assets and decentralized finance (DeFi). Though with more than 130 countries now looking into CBDCs and the tokenized asset market forecast at $16 trillion by 2030, the dynamic between public and private digital monies is shaping up to be the lifeblood of the future direction of payments, lending and monetary policy. This document examines whether or not these systems can work together, or whether their structural differences will create fragmentation, regulatory friction, and systemic risk. Employing a mixed-methods design that ranges from on-chain data analysis, comparative case studies related to major CBDC initiatives (for example, digital euro, digital yuan, Project mBridge, Project Aurum), to interviews with professionalsâcentral bankers, DeFi developers and regulatorsâwe address three crucial questions: (1) Under what circumstances can CBDCs be used as settlement infrastructure for tokenized assets without compromising monetary policy autonomy? (2) What are the implications of design decisions for CBDCs, in particular, programmability, privacy and access, for alignment with DeFi ecosystems? (3) Which governance mechanisms might align both public and private digital money to support inclusive, efficient and resilient financial markets? Our results favour a âlayered monetary architecture,â with CBDCs to serve as reliable, low-risk, secure settlement anchors and private tokenized finance to facilitate innovation, access and user-friendly services and innovative user experiences. In this paper, we present the Monetary Layer Compatibility Framework which, as we have mentioned, is a diagnostic instrument for tracking the alignment on five aspects of these criteria: settlement finality, programmability scope, privacy guarantees, access permissions, and regulatory hooks. Based on both empirical evidence and policy analysis, we suggest a âpublic anchor, private innovationâ model that maintains monetary sovereignty and benefits from the productivity gain from tokenization. The paper ends with practical policy recommendations to central banks and international institutions to promote interoperability, reduce disintermediation vulnerabilities and halt financial balkanization.
This article explores the economic trade-offs between centralized and decentralized financial systems. Centralized finance (CeFi) relies on regulated intermediaries such as banks and custodians, offering stability, regulatory oversight, and support for monetary policy. Decentralized finance (DeFi), based on smart contracts and cryptographic protocols, reduces barriers to entry and increases flexibility but introduces technical and operational risks. The paper examines efficiency, risk allocation, financial inclusion, innovation, and international implications, supported by quantitative evidence such as global account ownership, cryptocurrency market capitalization, and total value locked (TVL) in DeFi. The analysis highlights that neither system is categorically superior; effective policy should balance innovation and stability through coordinated, technically informed, and proportionate regulations.
Tansaya Kunaratskul, Ashley Lannquist, Andre Reslow, Nicolas Zhang
How should central banks explore tokenized reserves? Central banks are increasingly exploring how to make their reserves available to selected banks using distributed ledger technology, referred to as tokenized reserves. This chapter covers policy objectives for tokenized reserves, operating models and roles of central banks, implications for monetary policy implementation, alternative solutions, and implementation strategies. Ultimately, central banksâ strategic decisions and policy options will vary across jurisdictions, reflecting differences in available resources, legal systems, and policy priorities.
Real world asset tokenization (RWA) introduces programmable finance on chain tools to the market, while bringing cash like returns. This paper focuses on token treasury bond funds to explore whether they are re anchoring the yield benchmark of decentralized finance (DeFi). The key entry point of the study is to build a de facto "interest rate corridor", which is formed by DeFi's stable monetary loan interest rate around the volatility of token treasury bond yield. The research results show that due to the widespread risk exposure in the tokenized currency market, DeFi USD returns have gradually converged towards short-term interest rate benchmarks. What is more noteworthy is that its stay time in the narrow corridor centered on the yield of token treasury bond is significantly prolonged. This re anchoring effect not only narrows the long-standing divergence between cryptocurrency native interest rates and monetary policy benchmarks, but also reshapes the incentive mechanism for liquidity supply, and further tightens the integration channels between on chain markets and traditional fixed income markets on this basis.
Distributed Ledger Technologies (DLTs) fuse cryptographic immutability with decentralized consensus, transforming global finance, simultaneously hindering the forensic reconstruction of illicit value flows. This paper presents a systematic mapping of financial transaction tracing on DLTs through a rigorously designed Systematic Literature Review (SLR). Six research questions - covering enabling technologies, privacy primitives, tracking methods, structural limits, proposed mitigations, and future directions - guided the search. Three reviewers screened 120 publications from 2017â2025, resolving disagreements by adjudication and distilling 21 primary studies (17.5 % acceptance). The corpus converges on four technical pillars: heuristic/graph-based address clustering, machine-learning anomaly detection, cross-ledger correlation frameworks, and privacy-enhancing constructs such as ring signatures and zk-SNARKs. Our synthesis exposes a persistent tri-lemma among scalability, attribution accuracy, and privacy compliance, exacerbated by heterogeneous protocol designs and data-retention costs. To reconcile these issues, we articulate a four-layer tracing architecture that integrates high-throughput multi-chain ingestion, cache-efficient temporal graph indexing, explainable risk scoring, and privacy-preserving off-chain fusion with KYC anchors. This blueprint offers regulators, investigators, and researchers a scalable, GDPR-aligned pathway for illuminating opaque financial networks, while establishing a consolidated knowledge base and a forward research agenda for next-generation DLT traceability.
This paper investigates how the evolution of interbank payments towards central bank settlement, and thus central bank money as a settlement asset, has affected the dynamics of bank crises.We take the cluster of bank defaults in the United States in 2023 as a starting example and show how, alongside fractional reserves and fast digital communication, centralized settlement in central bank money played a critical role in triggering swift bank failures.We argue that technical centralization has amplified banks' fragility in the development of confidence crises, making bank runs easier and expanding the role of central banks to a point where conflict of interest becomes nearly inevitable.While previous literature has emphasized the effects of fast news spread and online banking, the role of settlement technology in recent bank runs has been largely overlooked.Thus we describe the stability consequences of different settlement architectures in detail, and also discuss potential improvements to the current architecture, particularly decentralized approaches built on distributed ledgers, to mitigate financial instability and reduce the negative effects of centralization without reverting to inefficient legacy systems.
Few studies examine whether the gap-filling effect, whereby the maturity structure of local government debt shapes corporate debt maturity, also holds in emerging, bank-dominated economies. Using data on Chinese local government financing vehicle (LGFV) bonds from 2009 to 2023, this study examines how the maturity structure of local government debt influences that of corporate debt. The results reveal a pronounced gap-filling effect, whereby longer local government debt maturities systematically crowd out long-term credit resources, raise corporate financing costs, and prompt firms to shorten their debt maturities. This effect is more salient during economic downturns and when local government debt levels are elevated. Heterogeneity analysis shows substantial variation in the gap-filling effect across regions, industries, and firm characteristics. In addition, firms with shorter debt maturities are found to face higher financial risks. This study contributes by providing policy evidence for fiscally decentralized emerging markets: local government maturity choices transmit to firmsâ financing structure, implying that local debt management is instrumental for financial stability.
This article explores the application of financial technologies in the auditing of decentralized finance (DeFi) and how these technologies can improve the audit process. The research aims to identify the main challenges faced in DeFi auditing and to offer recommendations for strengthening audit methodologies using financial technologies (FinTech). The article discusses decentralized finance and its innovative management principles based on blockchain technology, which fundamentally transforms traditional financial systems. The study identifies key risks associated with DeFi, such as vulnerabilities in smart contracts and the lack of regulatory frameworks. The theoretical foundation includes a detailed analysis of the differences between traditional and decentralized finance, highlighting DeFiâs advantages â lower operational costs, greater accessibility, and transparency â while addressing regulatory and security challenges. The research methodology is based on scientific literature analysis and the classification of FinTech tools according to established criteria to evaluate the effectiveness of audit methods and their potential for improvement. The main findings show that FinTech tools, such as artificial intelligence (e.g., decision tree models) and blockchain technology, enhance the reliability and speed of DeFi audits while highlighting the need for a more robust regulatory system. This article is relevant due to the rapid growth of the DeFi sector and its importance in the digital transformation of the financial industry. Moreover, this research aims to classify the most widely used financial technology tools according to their functions and analyze their impact on traditional and decentralized finance auditing processes, offering insights for improving audit methodologies.
Decentralized storage is one of the most natural applications built on blockchains and a central component of the Web3 ecosystem. Yet despite a decade of active development -- from IPFS and Filecoin to more recent entrants -- most of these storage protocols have received limited formal analysis of their incentive properties. Claims of incentive compatibility are sometimes made, but rarely proven. This gap matters: without well-designed incentives, a system may distribute storage but fail to truly decentralize it. We analyze Shelby -- a storage network protocol recently proposed by Aptos Labs and Jump Crypto -- and provide the first formal proof of its incentive properties. Our game-theoretic model shows that while off-chain audits alone collapse to universal shirking, Shelby's combination of peer audits with occasional on-chain verification yields incentive compatibility under natural parameter settings. We also examine coalition behavior and outline a simple modification that strengthens the protocol's collusion-resilience.
The rapid expansion of digital assets has created a conflict between technological innovation and environmental, social, and governance (ESG) principles, particularly concerning the energy consumption of legacy consensus mechanisms. This has led to the emergence of "sustainable" cryptocurrencies, raising the critical question of whether the market financially rewards sustainability. This study quantitatively investigates the existence and magnitude of an "ESG premium" in the digital asset market. A quasi-longitudinal study was conducted on a panel dataset of 20 cryptocurrencies (10 sustainable, 10 traditional) from January 1, 2021, to December 31, 2024. A detailed, transparent composite ESG score was developed to measure sustainability. The primary analysis utilized a panel data fixed-effects regression model to assess the relationship between asset prices and ESG scores, controlling for market capitalization, trading volume, market-wide indices, and key technological factors like protocol age, scalability, and developer activity. To address endogeneity and validate causality, we employed models with lagged independent variables. Further robustness checks were performed across bull and bear market sub-periods. A GARCH (1,1) model was used to analyze differences in price volatility. The primary regression model reveals a statistically and economically significant positive relationship between ESG scores and cryptocurrency prices. A 10-point increase in the ESG score is associated with a 4.1% price premium (b=0.0041, p < 0.001), even after controlling for technological modernity. This finding remains robust in models using lagged variables and across different market cycles. GARCH analysis confirms that sustainable cryptocurrencies exhibit significantly lower price volatility. In conclusion, the findings provide strong, robust empirical evidence for a persistent ESG premium in the cryptocurrency market. This suggests that investors price in the perceived long-term viability, reduced risk profile, and ethical alignment of sustainable assets, signaling a maturation of the market where non-financial, sustainability-focused metrics are integral to asset valuation.
Abdul Malik, Gayatri Putri, Hesti Putri, Ahmad Badruddin
The proliferation of crypto-assets has raised critical questions about their impact on global financial stability. This study rigorously investigates the structural evolution of the cryptocurrency market's role within the global financial system, testing the hypothesis that it has transitioned from a peripheral, shock-absorbing entity into a systemically significant transmitter of financial risk. We employ a Time-Varying Parameter Vector Autoregression (TVP-VAR) model on daily data from January 1, 2017, to December 31, 2024, examining the dynamic connectedness between a bespoke, rebalanced cryptocurrency index (CRIX20) and key global financial indicators (S&P 500, MSCI World, VIX, DXY). The econometric framework utilizes a Bayesian estimation approach with standard priors, a 200-day rolling window, and a 10-day forecast horizon for Generalized Forecast Error Variance Decompositions (GFEVD). Methodological robustness is confirmed through structural break tests and sensitivity analysis of the forecast horizon. Our findings reveal a profound structural transformation. Prior to mid-2020, the cryptocurrency market was a consistent net receiver of financial spillovers. A structural break, formally identified in the third quarter of 2020, marks a definitive regime shift. Post-break, the crypto market has become a significant and persistent net transmitter of risk to the traditional financial system. The total connectedness index for the entire system shows a marked secular increase, with the crypto market's contribution to systemic risk growing substantially. Gross spillover analysis confirms this shift is driven by a dramatic increase in risk transmission from the crypto market to other assets. In conclusion, the cryptocurrency market can no longer be considered an isolated ecosystem; it is now an integral and potentially destabilizing component of the global financial architecture. The era of crypto-assets as reliable diversifiers has waned, replaced by a new reality where shocks originating within this market pose a credible threat to broader financial stability. These findings present urgent challenges for regulatory oversight, systemic risk monitoring, and portfolio management.
We present LISA, an agentic smart contract vulnerability detection framework that combines rule-based and logic-based methods to address a broad spectrum of vulnerabilities in smart contracts. LISA leverages data from historical audit reports to learn the detection experience (without model fine-tuning), enabling it to generalize learned patterns to unseen projects and evolving threat profiles. In our evaluation, LISA significantly outperforms both LLM-based approaches and traditional static analysis tools, achieving superior coverage of vulnerability types and higher detection accuracy. Our results suggest that LISA offers a compelling solution for industry: delivering more reliable and comprehensive vulnerability detection while reducing the dependence on manual effort.
Benjamin Mudiangombe Mudiangombe, John Weirstrass Muteba Mwamba
This study explores the new insights into the integration and dynamic asymmetric volatility risk spillovers between Bitcoin, currency pairs (USD/ZAR, GBP/ZAR and EUR/ZAR), and traditional financial assets (ALSI, Bond, and Gold) in South Africa using daily data spanning the period from 2010 to 2024 and employing Time-Varying Parameter Vector Autoregression (TVP-VAR) and wavelet coherence. The findings revealed strengthened integration between traditional financial assets and currency pairs, as well as weak integration with BTC/ZAR. Furthermore, BTC/ZAR and traditional financial assets were receivers of shocks, while the currency pairs were transmitters of spillovers. Gold emerged as an attractive investment during periods of inflation or currency devaluation. However, the assets have a total connectedness index of 28.37%, offering a reduced systemic risk. Distinct patterns were observed in the short, medium, and long term in time scales and frequency. There is a diversification benefit and potential hedging strategies due to goldâs negative influence on BTC/ZAR. Bitcoinâs high volatility and lack of regulatory oversight continue to be deterrents for institutional investors. This study lays a solid foundation for understanding the financial dynamics in South Africa, offering valuable insights for investors and policymakers interested in the intricate linkages between BTC/ZAR, currency pairs, and traditional financial assets, allowing for more targeted policy measures.
This study examines how Bitcoinâs relationships with major financial assets evolved following the January 2024 spot ETF approval. Using DCC-GARCH analysis, we find Bitcoinâs correlation with stocks exhibits a complete trend reversal from declining to increasing trends, while other assets show more limited changes. TVP-VAR spillover analysis reveals declining Bitcoin self-spillover and strengthened bidirectional risk transmission with equity markets. These findings indicate the ETF approval altered Bitcoinâs market role, transitioning from decoupling to integration with financial assets and reducing its diversification benefits in equity-focused portfolios.
This chapter delves into the revolutionary emergence of Decentralized Finance (DeFi), its potential to revolutionize, and its vulnerabilities. Based on blockchain technology, DeFi bypasses conventional financial intermediaries through smart contracts to execute lending, trading, and other economic activities. The permissionless aspect of DeFi increases financial inclusion worldwide, especially for the unbanked and underbanked. Yet, this openness also exposes DeFi platforms to threats such as vulnerabilities in smart contracts, oracle manipulation, flash loan attacks, and governance attacks. Case studies like the Poly Network hack, Mango Markets manipulation, and Squid Game token rug pull illustrate these risks. The research covers technology innovations such as smart contract audits, formal verification, decentralized oracles, and AI-based threat detection to strengthen DeFi's future. It also examines how regulatory sandboxes and decentralized identification solutions can balance innovation and regulation.