IDEAS home Printed from https://ideas.repec.org/a/eee/beexfi/v40y2023ics2214635023000722.html
   My bibliography  Save this article

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

Author

Listed:
  • Saengchote, Kanis
  • Putniņš, Talis
  • Samphantharak, Krislert

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.

Suggested Citation

  • Saengchote, Kanis & Putniņš, Talis & Samphantharak, Krislert, 2023. "Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000722
    DOI: 10.1016/j.jbef.2023.100858
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2214635023000722
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.jbef.2023.100858?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    DeFi; Stablecoin; Trust; Incomplete contracts; Regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000722. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-behavioral-and-experimental-finance .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.