Grasping de(centralized) fi(nance) through the lens of economic theory

Arbeitspapier

In this article, we use a simple stylized model of collateralized lending to analyze the value proposition and limitations of decentralized finance (DeFi). DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs associated with intermediated lending and improve financial inclusion. Limitations are the volatility of the crypto collateral and stablecoins used for settlement, the possible incompleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limitations could improve the value of DeFi.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2022-43

Classification and Topics

• Classification: Wirtschaft
• Subject: Digital currencies and fintech ; Payment clearing and settlement systems

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chiu, Jonathan ; Kahn, Charles M. ; Koeppl, Thorsten V.
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2022

Further information

• DOI: doi:10.34989/swp-2022-43
• Handle: http://hdl.handle.net/10419/272987
• Last update: 10.03.2025, 11:41 AM CET