Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets
22 Pages Posted: 4 May 2020
Date Written: March 8, 2020
This paper explores the Decentralized Finance (DeFi) ecosystem. We examine how DeFi is emerging on top of the public Ethereum smart contract platform, compare it to the centralized architecture of traditional financial markets and highlight opportunities and potential risks of this ecosystem. We propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives and on-chain asset management protocols. We conclude that DeFi still is a niche market with certain risks, but also has interesting properties in terms of efficiency, transparency, accessibility and interoperability. As such, it may potentially contribute to a more robust and transparent financial infrastructure.
Keywords: Bitcoin, Blockchain, Cryptocurrencies, Decentralized Finance (DeFi), Distributed Ledger, Ethereum, Open Finance, Smart Contracts
JEL Classification: G15, G23, E59
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