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

Kanis Saengchote, Talis Putni\c{n}\v{s} and Krislert Samphantharak

Papers from arXiv.org

Abstract: Decentralized Finance (DeFi) is built on a fundamentally different paradigm: rather than having to trust individuals and institutions, participants in DeFi potentially only have to trust computer code that is 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 associated with a DeFi protocol, including a convicted criminal. We find that, in practice, DeFi does not (yet) fully remove the need for trust in individuals. Our findings suggest that that because smart contracts are incomplete, they are subject to run risk (Allen and Gale, 2004) and personal character and trust of individuals are still relevant in this alternative financial system.

Date: 2022-07
New Economics Papers: this item is included in nep-ban and nep-pay
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