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

22 Pages Posted: 4 May 2020

See all articles by Fabian Schär

Fabian Schär

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

Date Written: March 8, 2020

Abstract

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

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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