Systemic Fragility in Decentralized Markets

27 Pages Posted: 25 Jul 2022

See all articles by Alfred Lehar

Alfred Lehar

University of Calgary - Haskayne School of Business

Christine A. Parlour

University of California, Berkeley - Finance Group

Date Written: July 16, 2022

Abstract

We analyze a unique data set of collateral liquidations on two Decentralized Finance lending platforms - Compound and Aave. Such liquidations require arbitrageurs to repay the loan in return for the discounted collateral. Using Blockchain transaction data, we observe if arbitrageurs liquidate positions out of their own inventory or obtain "flash loans.'' To repay flash loans, arbitrageurs immediately sell the collateral asset. We document the high frequency price impact of such liquidity trades on nine different decentralized exchanges. Consistent with large block trades in equity markets there is a temporary and permanent price impact of collateral asset sales in DeFi. We document the effect of these trades on return distributions. Our work highlights the systemic fragility of decentralized markets.

Keywords: Decentralized Lending, Blockchain, Decentralized Finance, Systemic Risk

Suggested Citation

Lehar, Alfred and Parlour, Christine A., Systemic Fragility in Decentralized Markets (July 16, 2022). Available at SSRN: https://ssrn.com/abstract=4164833 or http://dx.doi.org/10.2139/ssrn.4164833

Alfred Lehar (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-4567 (Phone)

HOME PAGE: http://homepages.ucalgary.ca/~alehar/

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
670
Abstract Views
2,191
Rank
81,414
PlumX Metrics