Equilibrium in a DeFi Lending Market

61 Pages Posted: 22 Mar 2023 Last revised: 18 Apr 2024

See all articles by Thomas J Rivera

Thomas J Rivera

McGill University

Fahad Saleh

University of Florida

Quentin Vandeweyer

University of Chicago - Booth School of Business

Date Written: March 15, 2023

Abstract

We develop a model of Decentralized Finance (DeFi) lending platforms that set interest rates as programmable functions of the utilization of available funds. These platforms are unable to incorporate off-chain information into the platform’s interest rates, leading to inefficient DeFi equilibria that feature excess demand or supply. Absent uncertainty about withdrawals, these inefficiencies can be made arbitrarily small through an interest rate function that is highly sensitive to changes in utilization. In contrast, in the presence of withdrawal shocks, the optimal interest rate function must balance a trade-off between the efficiency and volatility of interest rates.

Keywords: Decentralized Finance, DeFi, DeFi Lending, Protocol for Loanable Funds, PLF

JEL Classification: D40, G20

Suggested Citation

Rivera, Thomas and Saleh, Fahad and Vandeweyer, Quentin, Equilibrium in a DeFi Lending Market (March 15, 2023). Available at SSRN: https://ssrn.com/abstract=4389890 or http://dx.doi.org/10.2139/ssrn.4389890

Thomas Rivera

McGill University ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5

Fahad Saleh (Contact Author)

University of Florida ( email )

Warrington College of Business
Gainesville, FL 32611
United States

HOME PAGE: http://www.fahadsaleh.com

Quentin Vandeweyer

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

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