Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending

Kanis Saengchote, Talis Putniņš and Krislert Samphantharak

Journal of Behavioral and Experimental Finance, 2023, vol. 40, issue C

Abstract: Decentralized Finance (DeFi) is built on a fundamentally different paradigm. Rather than trusting individuals and institutions, DeFi participants, in principle, only need to trust computer code enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress-tests this alternative paradigm by revealing the identities of individuals (including a convicted criminal) associated with the Abracadabra lending protocol. The revelation seriously damaged the protocol, indicating that, in practice, DeFi does not (yet) entirely remove the need for trust in individuals. Our findings suggest that smart contracts are incomplete and are subject to protocol-run risk. Thus, individuals’ character and trust remain relevant in this alternative financial system.

Keywords: DeFi; Stablecoin; Trust; Incomplete contracts; Regulation (search for similar items in EconPapers)
JEL-codes: G14 G23 G41 O33 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000722

DOI: 10.1016/j.jbef.2023.100858

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