IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2012.13230.html
   My bibliography  Save this paper

SoK: Lending Pools in Decentralized Finance

Author

Listed:
  • Massimo Bartoletti
  • James Hsin-yu Chiang
  • Alberto Lluch-Lafuente

Abstract

Lending pools are decentralized applications which allow mutually untrusted users to lend and borrow crypto-assets. These applications feature complex, highly parametric incentive mechanisms to equilibrate the loan market. This complexity makes the behaviour of lending pools difficult to understand and to predict: indeed, ineffective incentives and attacks could potentially lead to emergent unwanted behaviours. Reasoning about lending pools is made even harder by the lack of executable models of their behaviour: to precisely understand how users interact with lending pools, eventually one has to inspect their implementations, where the incentive mechanisms are intertwined with low-level implementation details. Further, the variety of existing implementations makes it difficult to distill the common aspects of lending pools. We systematize the existing knowledge about lending pools, leveraging a new formal model of interactions with users, which reflects the archetypal features of mainstream implementations. This enables us to prove some general properties of lending pools, such as the correct handling of funds, and to precisely describe vulnerabilities and attacks. We also discuss the role of lending pools in the broader context of decentralized finance.

Suggested Citation

  • Massimo Bartoletti & James Hsin-yu Chiang & Alberto Lluch-Lafuente, 2020. "SoK: Lending Pools in Decentralized Finance," Papers 2012.13230, arXiv.org.
    • Handle: RePEc:arx:papers:2012.13230
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2012.13230
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Guillermo Angeris & Tarun Chitra, 2020. "Improved Price Oracles: Constant Function Market Makers," Papers 2003.10001, arXiv.org, revised Jun 2020.
    2. Tarun Chitra & Alex Evans, 2020. "Why Stake When You Can Borrow?," Papers 2006.11156, arXiv.org.
    3. Yongge Wang, 2020. "Automated Market Makers for Decentralized Finance (DeFi)," Papers 2009.01676, arXiv.org, revised Sep 2020.
    4. Benjamin Egelund-Müller & Martin Elsman & Fritz Henglein & Omri Ross, 2017. "Automated Execution of Financial Contracts on Blockchains," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 59(6), pages 457-467, December.
    5. Daniel Perez & Sam M. Werner & Jiahua Xu & Benjamin Livshits, 2020. "Liquidations: DeFi on a Knife-edge," Papers 2009.13235, arXiv.org, revised Dec 2021.
    6. Michael Darlin & Nikolaos Papadis & Leandros Tassiulas, 2020. "Optimal Bidding Strategy for Maker Auctions," Papers 2009.07086, arXiv.org, revised May 2021.
    7. Lewis Gudgeon & Sam M. Werner & Daniel Perez & William J. Knottenbelt, 2020. "DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency," Papers 2006.13922, arXiv.org, revised Oct 2020.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jiahua Xu & Nikhil Vadgama, 2021. "From banks to DeFi: the evolution of the lending market," Papers 2104.00970, arXiv.org, revised Dec 2022.
    2. Sam M. Werner & Daniel Perez & Lewis Gudgeon & Ariah Klages-Mundt & Dominik Harz & William J. Knottenbelt, 2021. "SoK: Decentralized Finance (DeFi)," Papers 2101.08778, arXiv.org, revised Sep 2022.
    3. Simon Cousaert & Jiahua Xu & Toshiko Matsui, 2021. "SoK: Yield Aggregators in DeFi," Papers 2105.13891, arXiv.org, revised Mar 2022.
    4. Xiaotong Sun & Charalampos Stasinakis & Georigios Sermpinis, 2022. "Decentralization illusion in Decentralized Finance: Evidence from tokenized voting in MakerDAO polls," Papers 2203.16612, arXiv.org, revised Mar 2023.
    5. Johannes Rude Jensen & Mohsen Pourpouneh & Kurt Nielsen & Omri Ross, 2021. "The Homogenous Properties of Automated Market Makers," Papers 2105.02782, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Estelle Sterrett & Waylon Jepsen & Evan Kim, 2022. "Replicating Portfolios: Constructing Permissionless Derivatives," Papers 2205.09890, arXiv.org, revised Jun 2022.
    2. Raphael Auer & Bernhard Haslhofer & Stefan Kitzler & Pietro Saggese & Friedhelm Victor, 2023. "The Technology of Decentralized Finance (DeFi)," BIS Working Papers 1066, Bank for International Settlements.
    3. Lioba Heimbach & Eric G. Schertenleib & Roger Wattenhofer, 2023. "Short Squeeze in DeFi Lending Market: Decentralization in Jeopardy?," Papers 2302.04068, arXiv.org, revised Jun 2023.
    4. Dev Churiwala & Bhaskar Krishnamachari, 2022. "QLAMMP: A Q-Learning Agent for Optimizing Fees on Automated Market Making Protocols," Papers 2211.14977, arXiv.org.
    5. Sam M. Werner & Daniel Perez & Lewis Gudgeon & Ariah Klages-Mundt & Dominik Harz & William J. Knottenbelt, 2021. "SoK: Decentralized Finance (DeFi)," Papers 2101.08778, arXiv.org, revised Sep 2022.
    6. Guillermo Angeris & Alex Evans & Tarun Chitra, 2021. "Replicating Monotonic Payoffs Without Oracles," Papers 2111.13740, arXiv.org.
    7. Peplluis R. Esteva & Andrés El-Fakdi & Alberto Ballesteros-Rodríguez, 2023. "Invoice Discounting Using Kelly Criterion by Automated Market Makers-like Implementations," Mathematics, MDPI, vol. 11(7), pages 1-37, March.
    8. Daniel Kirste & Niclas Kannengie{ss}er & Ricky Lamberty & Ali Sunyaev, 2023. "How Automated Market Makers Approach the Thin Market Problem in Cryptoeconomic Systems," Papers 2309.12818, arXiv.org, revised Sep 2023.
    9. Makridis, Christos A. & Fröwis, Michael & Sridhar, Kiran & Böhme, Rainer, 2023. "The rise of decentralized cryptocurrency exchanges: Evaluating the role of airdrops and governance tokens," Journal of Corporate Finance, Elsevier, vol. 79(C).
    10. Arman Abgaryan & Utkarsh Sharma, 2023. "Dynamic Function Market Maker," Papers 2307.13624, arXiv.org.
    11. Kaihua Qin & Liyi Zhou & Pablo Gamito & Philipp Jovanovic & Arthur Gervais, 2021. "An Empirical Study of DeFi Liquidations: Incentives, Risks, and Instabilities," Papers 2106.06389, arXiv.org, revised Oct 2021.
    12. Alessandra Cretarola & Gianna Figà-Talamanca & Cyril Grunspan, 2021. "Blockchain and cryptocurrencies: economic and financial research," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 781-787, December.
    13. Bhaskar Krishnamachari & Qi Feng & Eugenio Grippo, 2021. "Dynamic Curves for Decentralized Autonomous Cryptocurrency Exchanges," Papers 2101.02778, arXiv.org.
    14. Christian Sillaber & Bernhard Waltl & Horst Treiblmaier & Ulrich Gallersdörfer & Michael Felderer, 2021. "Laying the foundation for smart contract development: an integrated engineering process model," Information Systems and e-Business Management, Springer, vol. 19(3), pages 863-882, September.
    15. Zhimeng Yang & Ariah Klages-Mundt & Lewis Gudgeon, 2023. "Oracle Counterpoint: Relationships between On-chain and Off-chain Market Data," Papers 2303.16331, arXiv.org, revised Jul 2023.
    16. Jiahua Xu & Nikhil Vadgama, 2021. "From banks to DeFi: the evolution of the lending market," Papers 2104.00970, arXiv.org, revised Dec 2022.
    17. Matthias Nadler & Felix Bekemeier & Fabian Schar, 2022. "DeFi Risk Transfer: Towards A Fully Decentralized Insurance Protocol," Papers 2212.10308, arXiv.org.
    18. Teng Andrea Xu & Jiahua Xu & Kristof Lommers, 2022. "DeFi vs TradFi: Valuation Using Multiples and Discounted Cash Flow," Papers 2210.16846, arXiv.org.
    19. Saengchote, Kanis, 2023. "Decentralized lending and its users: Insights from compound," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    20. Jiahua Xu & Krzysztof Paruch & Simon Cousaert & Yebo Feng, 2021. "SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) Protocols," Papers 2103.12732, arXiv.org, revised Mar 2023.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:arx:papers:2012.13230. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    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.