Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance

Tim Weingärtner, Fabian Fasser, Pedro Reis Sá da Costa and Walter Farkas
Additional contact information
Tim Weingärtner: Lucerne University of Applied Sciences and Art
Fabian Fasser: Lucerne University of Applied Sciences and Art
Pedro Reis Sá da Costa: Lucerne University of Applied Sciences and Art
Walter Farkas: University of Zurich, ETH Zurich and Swiss Finance Institute

No 23-96, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Decentralized finance (DeFi) promises a revolution in financial accessibility, transparency, and automation. Yet, its very novelty exposes participants to a number of additional risks and challenges. This study aims to address the risks associated with DeFi, while also conducting a comparative analysis to those of classical/traditional finance (TradFi). After introducing DeFi and its defining characteristics, such as the use of smart contracts, blockchain technology, and decentralized governance, the paper outlines the principal risks associated with DeFi. Drawing insights from an extensive literature review of 200 recent articles, of which 50 were thoroughly analyzed, the study compares risks of DeFi and TradFi, categorizing these into systematic and unsystematic risks. Furthermore, we introduce the ‘risk wheel’, an innovative tool tailored to understand and navigate the subtleties of DeFi risks, finding potential applications in risk assessment, management, and even education. This paper’s primary objective is to provide a detailed and impartial examination of the risks associated with DeFi and their comparison to traditional finance in order to assist stakeholders in making informed decisions and mitigating possible losses.

Keywords: decentralized finance; DeFi; risk management; literature review; risk classification; risk wheel. (search for similar items in EconPapers)
Pages: 27 pages
Date: 2023-10
New Economics Papers: this item is included in nep-ban and nep-pay
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4607944 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2396

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().