DeFi and the Future of Finance

85 Pages Posted: 15 Dec 2020 Last revised: 16 Jan 2021

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Ashwin Ramachandran

Independent

Joey Santoro

Fei Protocol

Date Written: January 15, 2021

Abstract

Our legacy financial infrastructure has both limited growth opportunities and contributed to the inequality of opportunities. Around the world, 1.7 billion are unbanked. Small businesses, even those with a banking relationship, often must rely on high-cost financing, such as credit cards, because traditional banking excludes them. High costs also impact retailers who lose 3% on every credit card sales transaction. These total costs for small businesses are enormous by any metric. The result is less investment and decreased economic growth. Decentralized finance, or DeFi, poses a challenge to the current system and offers a number of potential solutions to the problems inherent in the traditional financial infrastructure. While there are many fintech initiatives, we argue that the ones that embrace the current banking infrastructure are likely to be fleeting. We argue those initiatives that use decentralized methods - in particular blockchain technology - have the best chance to define the future of finance.

Comments: There is a live version of our paper. We welcome your comments and suggestions. It is available here.

Keywords: Decentralized finance, DeFi; Fintech, Flash loans, Flash swaps, Automatic Market Maker, Cryptocurrency, Uniswap, MakerDAO, Compound, Ethereum, Aave, Yield protocol, ERC-20, Initial DeFi Offering, dYdX, Synthetix, Keeper, Set protocol

JEL Classification: A10, B10, D40, E44, F30, F60, G10, G21, G23, G51, I10, K10, L14, M10, O16, O33, O40, P10

Suggested Citation

Harvey, Campbell R. and Ramachandran, Ashwin and Santoro, Joseph, DeFi and the Future of Finance (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=3711777 or http://dx.doi.org/10.2139/ssrn.3711777

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ashwin Ramachandran

Independent ( email )

Joseph Santoro

Fei Protocol ( email )

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