Efficiency and Security in DeFi Lending

Sylvain Carré () and Franck Gabriel ()
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Sylvain Carré: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Franck Gabriel: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We investigate the design of efficient DeFi lending interest rate mechanisms (IRMs) in a tractable general equilibrium model. One notable feature of our framework, which contrasts with other narratives, is that a friction makes the optimal utilization rate state-dependent. Specifically, the friction we consider is that the security of the underlying (Proof-of-Stake) blockchain is endogenous to the market value of the staking pool. Our analysis provides a new interpretation of what an IRM does. Our main results are to rationalize the widespread use of IRMs depending on the utilization rate only by proving that those are optimal under a condition that we explicit; and to construct more general mechanisms restoring efficiency when this condition is not met.

Keywords: Interest Rate Mechanism; Efficiency; Security; Lending; Welfare; Protocol design; Decentralized finance; Proof-of-Stake; Blockchain (search for similar items in EconPapers)
Date: 2022-12-29
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