Monetary Policy, Digital Assets, and DeFi Activity

32 Pages Posted: 1 Mar 2023

See all articles by Antzelos Kyriazis

Antzelos Kyriazis

affiliation not provided to SSRN

Iason Ofeidis

Yale University

Georgios Palaiokrassas

Yale University

Leandros Tassiulas

Yale University - Yale Institute for Network Science

Date Written: February 2023

Abstract

This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.

Keywords: Monetary Policy, Bitcoin, Ethereum, Digital Assets, Decentralized Finance

Suggested Citation

Kyriazis, Antzelos and Ofeidis, Iason and Palaiokrassas, Georgios and Tassiulas, Leandros, Monetary Policy, Digital Assets, and DeFi Activity (February 2023). Available at SSRN: https://ssrn.com/abstract=4362546 or http://dx.doi.org/10.2139/ssrn.4362546

Antzelos Kyriazis (Contact Author)

affiliation not provided to SSRN

Iason Ofeidis

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Georgios Palaiokrassas

Yale University ( email )

United States

Leandros Tassiulas

Yale University - Yale Institute for Network Science

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