Contagion in Decentralized Lending Protocols: A Case Study of Compound

Natkamon Tovanich (), Myriam Kassoul, Simon Weidenholzer and Julien Prat
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Natkamon Tovanich: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris
Myriam Kassoul: CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris

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Abstract: We study financial contagion in Compound V2, a decentralized lending protocol deployed on the Ethereum blockchain. We explain how to construct the balance sheets of Compound's liquidity pools and use our methodology to characterize the financial network. Our analysis reveals that most users either borrow stablecoins or engage in liquidity mining. We then study the robustness of Compound through a series of stress tests, identifying the pools that are most likely to set off a cascade of defaults.

Keywords: systemic risk; decentralized finance; financial contagion; financial network; stress test (search for similar items in EconPapers)
Date: 2023-11-30
New Economics Papers: this item is included in nep-ban
Note: View the original document on HAL open archive server: https://hal.science/hal-04221228v1
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Published in Proceedings of the 2023 Workshop on Decentralized Finance and Security, ACM, Nov 2023, Copenhagen, Denmark. ⟨10.1145/3605768.3623544⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04221228

DOI: 10.1145/3605768.3623544

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