Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance

Tim Weingärtner (), Fabian Fasser, Pedro Reis Sá da Costa and Walter Farkas
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Tim Weingärtner: School of Computer Science and Information Technology, Lucerne University of Applied Sciences and Arts, 6343 Rotkreuz, Switzerland
Fabian Fasser: School of Computer Science and Information Technology, Lucerne University of Applied Sciences and Arts, 6343 Rotkreuz, Switzerland
Pedro Reis Sá da Costa: School of Computer Science and Information Technology, Lucerne University of Applied Sciences and Arts, 6343 Rotkreuz, Switzerland
Walter Farkas: Department of Banking and Finance, University of Zürich, 8032 Zürich, Switzerland

JRFM, 2023, vol. 16, issue 10, 1-25

Abstract: Decentralized finance (DeFi) promises a revolution in financial accessibility, transparency, and automation. Yet, its very novelty exposes participants to a number of additional risks and challenges. This study aims to address the risks associated with DeFi, while also conducting a comparative analysis to those of classical/traditional finance (TradFi). After introducing DeFi and its defining characteristics, such as the use of smart contracts, blockchain technology, and decentralized governance, the paper outlines the principal risks associated with DeFi. Drawing insights from an extensive literature review of 200 recent articles, of which 50 were thoroughly analyzed, the study compares risks of DeFi and TradFi, categorizing these into systematic and unsystematic risks. Furthermore, we introduce the ‘risk wheel’, an innovative tool tailored to understand and navigate the subtleties of DeFi risks, finding potential applications in risk assessment, management, and even education. This paper’s primary objective is to provide a detailed and impartial examination of the risks associated with DeFi and their comparison to traditional finance in order to assist stakeholders in making informed decisions and mitigating possible losses.

Keywords: decentralized finance; DeFi; risk management; literature review; risk classification; risk wheel (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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