Cryptocurrencies and Decentralized Finance (DeFi)

Igor Makarov and Antoinette Schoar

No 30006, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.

JEL-codes: G1 G2 G20 G21 G23 G3 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg, nep-fmk, nep-isf, nep-mon and nep-pay
Note: AP CF ME
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Citations: View citations in EconPapers (31)

Published as Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralized Finance (DeFi)," Brookings Papers on Economic Activity, vol 2022(1), pages 141-215.

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