Efficiency and Security in DeFi Lending

Sylvain Carré () and Franck Gabriel ()
Additional contact information
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

Working Papers from HAL

Abstract: We construct a tractable general equilibrium model of DeFi lending to shed light on the role of pricing rules. We determine how the rule controls key equilibrium variables such as the utilization rate. Our model delivers a measure of welfare which incorporates the DeFi borrowing rate and the security of the underlying (Proof-of-Stake) blockchain, which we use to find welfare-maximizing pricing rules. Using a genuine function of the utilization rate becomes meaningful when there is parameter uncertainty. We establish conditions under which the first-best can be implemented by such a function, which we exhibit explicitly. When these conditions are not met, allowing the rule to also depend on the staking level restores efficiency. Our analysis leads to several other practical recommendations and conceptual clarifications.

Keywords: Blockchain; Proof-of-Stake; Decentralized finance; Protocol design; Welfare; Lending; Security (search for similar items in EconPapers)
Date: 2022-12-29
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:wpaper:hal-04867554

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().