Does DeFi Democratize Access to Financial Services?

Abstract

Blockchain-based decentralized Finance (DeFi) aims to promote financial inclusion by removing centralized intermediaries and providing direct services to users. This paper investigates whether Decentralized Financial (DeFi) lending markets, one of the largest DeFi applications, provide equal access. DeFi lending operates similarly to margin lending or repo transactions. Most borrowers use cryptocurrencies as collateral to borrow stablecoins, which are cryptocurrencies pegged to the US dollar. Using data at the account level, I find that highly leveraged borrowers who pledge low collateral relative to their loan amounts are constrained by collateral requirements. After platforms relax collateral requirements, highly leveraged borrowers increase borrowing and leverage further. Overall, this paper suggests that stringent collateral requirements in DeFi lending restrict access to borrowers who are already asset-rich.

Keywords: Blockchain, Fintech, Decentralized Finance, Decentralized Lending, Collateral

JEL Classification: D40, G10, G20