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Decentralized lending and its users: Insights from Compound

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  • Kanis Saengchote

Abstract

Permissionless blockchains offer an information environment where users can interact privately without fear of censorship. Financial services can be programmatically coded via smart contracts to automate transactions without the need for human intervention or knowing user identity. This new paradigm is known as decentralized finance (DeFi). We investigate Compound (a leading DeFi lending protocol) to show how it works in this novel information environment, who its users are, and what factors determine their participation. On-chain transaction data shows that loan durations are short (31 days on average), and many users borrow to support leveraged investment strategies (yield farming). We show that systemic risk in DeFi arises from concentration and interconnection, and how traditional risk management practices can be challenging for DeFi.

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  • Kanis Saengchote, 2022. "Decentralized lending and its users: Insights from Compound," Papers 2212.05734, arXiv.org.
    • Handle: RePEc:arx:papers:2212.05734
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    Cited by:

    1. 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.
    2. Raphael Auer & Bernhard Haslhofer & Stefan Kitzler & Pietro Saggese & Friedhelm Victor, 2024. "The technology of decentralized finance (DeFi)," Digital Finance, Springer, vol. 6(1), pages 55-95, March.
    3. Jiahua Xu & Yebo Feng, 2022. "Reap the Harvest on Blockchain: A Survey of Yield Farming Protocols," Papers 2210.04194, arXiv.org, revised Dec 2022.
    4. 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.).

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