Risk-Free Interest Rates in Decentralized Finance

5th IEEE Blockchain Computing and Applications Conference

27 Pages Posted: 27 Apr 2022 Last revised: 6 Nov 2023

See all articles by Ben Charoenwong

Ben Charoenwong

National University of Singapore - Department of Finance; Chicago Global

Robert M. Kirby

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

Jonathan Reiter

ChainArgos; Data Finnovation

Date Written: October 2023

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 (October 2023). 5th IEEE Blockchain Computing and Applications Conference, 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

Chicago Global ( email )

67 AYER RAJAH CRESCENT, #02-10/17, Singapore
Singapore, 139950
Singapore

HOME PAGE: http://chicago.global

Robert M. Kirby

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

Salt Lake City, UT
United States

Jonathan Reiter

ChainArgos ( email )

1 North Bridge Road
#01-01
Singapore, 179094
Singapore

Data Finnovation ( email )

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

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