Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets

24 Pages Posted: 4 May 2020 Last revised: 11 Feb 2021

See all articles by Fabian Schär

Fabian Schär

Center for Innovative Finance, University of Basel; University of Basel - Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2020

Abstract

The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. This paper highlights opportunities and potential risks of the DeFi ecosystem. I 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. I conclude that DeFi still is a niche market with certain risks but that it also has interesting properties in terms of efficiency, transparency, accessibility, and composability. As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure. (JEL G15, G23, E59)

Keywords: Bitcoin, Blockchain, Cryptocurrencies, Decentralized Finance (DeFi), Distributed Ledger, Ethereum, Open Finance, Smart Contracts

JEL Classification: G15, G23, E59

Suggested Citation

Schär, Fabian, Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets (March 8, 2020). Available at SSRN: https://ssrn.com/abstract=3571335 or http://dx.doi.org/10.2139/ssrn.3571335

Fabian Schär (Contact Author)

Center for Innovative Finance, University of Basel ( email )

Basel, 4001
Switzerland

HOME PAGE: http://cif.unibas.ch

University of Basel - Economics Department ( email )

Petersgraben 51
Basel, CH-4003
Switzerland

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