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Cryptocurrencies and Decentralized Finance (DeFi)

Author

Listed:
  • Igor Makarov
  • Antoinette Schoar

Abstract

The paper provides an overview of cryptocurrencies and decentralized finance. The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance, anti-money laundering laws, and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.

Suggested Citation

  • Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralized Finance (DeFi)," NBER Working Papers 30006, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30006
    Note: AP CF ME
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    Citations

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    Cited by:

    1. Benjamin Lester, 2024. "It’s Not Just Who You Know, It’s How You Know Them," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(1), pages 12-17, March.
    2. Walid Mensi & Mariya Gubareva & Hee-Un Ko & Xuan Vinh Vo & Sang Hoon Kang, 2023. "Tail spillover effects between cryptocurrencies and uncertainty in the gold, oil, and stock markets," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.
    3. Iulia-Monica Oehler-Șincai & Claudia Gabriela Baicu & Sorin-Nicolae Curcă, 2022. "Fragmentation and Concentration within the International Payments, System – Risks, Challenges, Opportunities," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 10(2), pages 35-45, December.
    4. Joseph Abadi, 2024. "Making Sense of Decentralized Finance," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(1), pages 18-24, March.
    5. Deborah Miori & Mihai Cucuringu, 2022. "DeFi: data-driven characterisation of Uniswap v3 ecosystem & an ideal crypto law for liquidity pools," Papers 2301.13009, arXiv.org, revised Jan 2023.
    6. Francesca Carapella & Edward Dumas & Jacob Gerszten & Nathan Swem, 2022. "Decentralized Finance (DeFi): Transformative Potential and Associated Risks," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2022(14), October.
    7. Francesca Carapella & Nathan Swem, 2022. "Decentralized Finance (DeFi): Transformative Potential & Associated Risks," Finance and Economics Discussion Series 2022-057, Board of Governors of the Federal Reserve System (U.S.).
    8. Lukasz A. Drozd & Marina Tavares, 2024. "Generative AI: A Turning Point for Labor’s Share?," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 9(1), pages 2-11, March.
    9. Kirimhan, Destan, 2023. "Importance of anti-money laundering regulations among prosumers for a cybersecure decentralized finance," Journal of Business Research, Elsevier, vol. 157(C).
    10. Katherine Baer & Ruud De Mooij & Shafik Hebous & Michael Keen, 2023. "Taxing cryptocurrencies," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(3), pages 478-497.
    11. Chemaya, Nir & Cong, Lin William & Joergensen, Emma & Liu, Dingyue & Zhang, Luyao, 2023. "Uniswap Daily Transaction Indices by Network," OSF Preprints ube2z, Center for Open Science.
    12. Anton Badev & Cy Watsky, 2023. "Interconnected DeFi: Ripple Effects from the Terra Collapse," Finance and Economics Discussion Series 2023-044, Board of Governors of the Federal Reserve System (U.S.).
    13. Jean Barthélémy & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    14. Nir Chemaya & Lin William Cong & Emma Jorgensen & Dingyue Liu & Luyao Zhang, 2023. "Uniswap Daily Transaction Indices by Network," Papers 2312.02660, arXiv.org.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G3 - Financial Economics - - Corporate Finance and Governance

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