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Decentralized Finance (DeFi): Transformative Potential and Associated Risks

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Abstract

Financial services in the crypto finance world are provided by a combination of centralized finance (CeFi) organizations and decentralized finance (DeFi). CeFi's are roughly similar to traditional financial intermediaries, but DeFi seeks to provide services using smart contracts (computer code) rather than an intermediary. DeFi's unusual structure creates some interesting potential but also raises new risks in addition to those already inherent in blockchains and crypto finance. This paper reviews some of the opportunities and risks.

Suggested Citation

  • 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.
    • Handle: RePEc:fip:a00068:96693
    DOI: 10.29338/ph2022-14
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    References listed on IDEAS

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    1. Kanis Saengchote, 2022. "Decentralized lending and its users: Insights from Compound," Papers 2212.05734, arXiv.org.
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    4. Budish, Eric B., 2018. "The Economic Limits of Bitcoin and the Blockchain," Working Papers 279, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Tim Weingärtner & Fabian Fasser & Pedro Reis Sá da Costa & Walter Farkas, 2023. "Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance," JRFM, MDPI, vol. 16(10), pages 1-25, October.
    2. Iveta Grigorova & Aleksandar Karamfilov & Radostin Merakov & Aleksandar Efremov, 2023. "Simulation of Dynamic Performance of DeFi Protocol Based on Historical Crypto Market Behavior," Risks, MDPI, vol. 12(1), pages 1-20, December.

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    More about this item

    Keywords

    Decentralized finance; blockchain; cryptocurrency; financial services; financial stability;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D26 - Microeconomics - - Production and Organizations - - - Crowd-Based Firms
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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