Grasping De(centralized) Fi(nance) through the Lens of Economic Theory

Jonathan Chiu (), Thorsten V. Koeppl () and Charles Kahn
Additional contact information
Jonathan Chiu: Bank of Canada

No 1489, Working Paper from Economics Department, Queen's University

Abstract: In this viewpoint article, we provide an analysis of the value proposition of De(centralized) Fi(nance) and its limitations using a simple stylized model of collateralized lending. 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 nancial inclusion. Limitations are the volatility of 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 limiations could improve the value of DeFi.

Keywords: Decentralized Finance; Cryptocurrency; Stablecoins; Collateralized Lending (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-08
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-pay
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Citations: View citations in EconPapers (1)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1489.pdf First version 2022 (application/pdf)

Related works:
Journal Article: Grasping decentralized finance through the lens of economic theory (2022)
Working Paper: Grasping De(centralized) Fi(nance) Through the Lens of Economic Theory (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1489

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