Grasping de(centralized) fi(nance) through the lens of economic theory

Jonathan Chiu, Thorsten V. Koeppl, Charles M. Kahn

In this viewpoint article, we provide an analysis of the value proposition of De(centralized) Fi(nance) and its limitations using a simple stylized model of collateralized lending. DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs asso- ciated with intermediated lending and improve financial inclusion. Limitations are the volatility of crypto collateral and stablecoins used for settlement, the possible incom- pleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limiations could improve the value of DeFi.

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Year of publication:	8-2022
Authors:	Chiu, Jonathan ; Koeppl, Thorsten V. ; Kahn, Charles M.
Publisher:	Kingston, Ontario, Canada : Department of Economics, Queen's University
Subject:	Decentralized Finance \| Cryptocurrency \| Stablecoins \| Collateralized Lending \| Virtuelle Währung \| Virtual currency \| Kreditgeschäft \| Bank lending \| Kreditrationierung \| Credit rationing \| Kreditmarkt \| Credit market \| Theorie \| Theory