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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
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    References listed on IDEAS

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    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.
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    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. Johannes Rude Jensen & Mohsen Pourpouneh & Kurt Nielsen & Omri Ross, 2021. "The Homogenous Properties of Automated Market Makers," Papers 2105.02782, arXiv.org.
    4. Simon Cousaert & Jiahua Xu & Toshiko Matsui, 2021. "SoK: Yield Aggregators in DeFi," Papers 2105.13891, arXiv.org, revised Mar 2022.
    5. Xiaotong Sun & Charalampos Stasinakis & Georigios Sermpinis, 2022. "Decentralization illusion in DeFi: Evidence from MakerDAO," Papers 2203.16612, arXiv.org.

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