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Network Topology in Decentralized Finance

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  • Saengchote, K
  • Castro-Iragorri, C

Abstract

The composability and anonymity of participants in Decentralized Finance pose significant challenges in understanding their interactions and the buildup of risk within the network. We map the interconnections among decentralized finance protocols using transactions among contracts and addresses, explore singlelayer and multiplex network properties and quantify the financial exposure of the most critical nodes. We observe scale-free properties similar to traditional financial networks, but the inclusion of user interactions and the influence of externally owned accounts yield distinct network characteristics. Furthermore, centrality measures and high-frequency metrics provide insights into systemically important participants and at-risk protocols, necessitating further research to develop robust risk measures. By identifying potential vulnerabilities and developing appropriate risk management strategies, the stakeholders can help ensure the stability and safety of decentralized finance as a viable alternative to traditional financial systems.

Suggested Citation

  • Saengchote, K & Castro-Iragorri, C, 2023. "Network Topology in Decentralized Finance," Documentos de Trabajo 20782, Universidad del Rosario.
    • Handle: RePEc:col:000092:020782
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    References listed on IDEAS

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    1. Berndsen, Ron J. & León, Carlos & Renneboog, Luc, 2018. "Financial stability in networks of financial institutions and market infrastructures," Journal of Financial Stability, Elsevier, vol. 35(C), pages 120-135.
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    3. Yun, Tae-Sub & Jeong, Deokjong & Park, Sunyoung, 2019. "“Too central to fail” systemic risk measure using PageRank algorithm," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 251-272.
    4. Ziqiao Ao & Lin William Cong & Gergely Horvath & Luyao Zhang, 2022. "Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain," Papers 2206.08401, arXiv.org, revised Nov 2023.
    5. 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.
    6. León, Carlos & Berndsen, Ron J., 2014. "Rethinking financial stability: Challenges arising from financial networks’ modular scale-free architecture," Journal of Financial Stability, Elsevier, vol. 15(C), pages 241-256.
    7. Kanis Saengchote, 2021. "Where Do DeFi Stablecoins Go? A Closer Look at What DeFi Composability Really Means," PIER Discussion Papers 156, Puey Ungphakorn Institute for Economic Research.
    8. Chen, Yan & Bellavitis, Cristiano, 2020. "Blockchain disruption and decentralized finance: The rise of decentralized business models," Journal of Business Venturing Insights, Elsevier, vol. 13(C).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Schuler, Katrin & Nadler, Matthias & Schär, Fabian, 2023. "Contagion and loss redistribution in crypto asset markets," Economics Letters, Elsevier, vol. 231(C).

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    More about this item

    Keywords

    Blockchain; composability; networks;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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