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Risk-Free Interest Rates in Decentralized Finance

27 Pages Posted: 27 Apr 2022 Last revised: 28 Aug 2022

See all articles by Ben Charoenwong

Ben Charoenwong

National University of Singapore - Department of Finance

Robert M. Kirby

University of Utah - School of Computing and Scientific Computing and Imaging Institute

Jonathan Reiter

Data Finnovation; ChainArgos

Date Written: August 12, 2022

Abstract

Decentralized Finance (DeFi) aims to use advancements in both computation and cryptography to tackle standard economic problems. It must, therefore, operate within the intersection of constraints required by both the computer science and economic domains. We explore a foundational question at the junction of those fields: is it possible to synthesize variable market-clearing risk-free yield for native tokens via smart contracts? We show using a stylized model representing a large class of existing decentralized consensus algorithms that this is not possible. This places strong bounds on what decentralized financial products can be built and constrains the shape of future developments in DeFi. Among other limitations, our results reveal that markets in DeFi are incomplete.

Keywords: DeFi, cryptocurrency

JEL Classification: G12, E42, E43, E51, E52

Suggested Citation

Charoenwong, Ben and Kirby, Robert M. and Reiter, Jonathan, Risk-Free Interest Rates in Decentralized Finance (August 12, 2022). Available at SSRN: https://ssrn.com/abstract=4083679 or http://dx.doi.org/10.2139/ssrn.4083679

Ben Charoenwong (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/519-ben

Robert M. Kirby

University of Utah - School of Computing and Scientific Computing and Imaging Institute ( email )

Salt Lake City, UT
United States

Jonathan Reiter

Data Finnovation ( email )

1 North Bridge Road #01-01
High Street Center
Singapore, 179094
Singapore

ChainArgos ( email )

1 north bridge road
01-01
Singapore, 179094
Singapore

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