Blockchain Banks and the Global Systematically Important Protocol (G-SIP) Framework
26 Pages Posted: 2 Aug 2023 Last revised: 7 Dec 2023
Date Written: December 5, 2023
Abstract
Financial services built on blockchains are often called decentralized finance (DeFi) protocols. Blockchain banks are important players in the DeFi ecosystem and can pose systemic risks just like their traditional counterparts. In this paper, we develop a systemic risk measure based on the BIS’ G-SIB framework, which we call the Global Systematically Important Protocol (G-SIP) framework, which emphasizes interconnectivity but requires detailed knowledge of protocol smart contracts to compute. We compute the G-SIP score for the Aave, Compound, Liquity, and MakerDAO, which account for 88% of blockchain banks on Ethereum, and find that score changes are related to key events in DeFi. The G-SIP score captures different aspects of risk than the loan-to-value (LTV) ratio and concentration ratios and can be useful for DeFi surveillance.
Keywords: DeFi, blockchain, banking, stablecoin, systemic risk
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation