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Cryptocurrencies and decentralized finance (DeFi)

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  • Makarov, Igor
  • Schoar, Antoinette

Abstract

The paper provides an overview of cryptocurrencies and decentralized finance (DeFi). The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance and anti–money laundering laws and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.

Suggested Citation

  • Makarov, Igor & Schoar, Antoinette, 2022. "Cryptocurrencies and decentralized finance (DeFi)," LSE Research Online Documents on Economics 117711, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:117711
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    File URL: http://eprints.lse.ac.uk/117711/
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    References listed on IDEAS

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    1. David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
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    Cited by:

    1. Gök, Remzi, 2025. "Spillovers between cryptocurrency, DeFi, carbon, and energy markets: A frequency quantile-on-quantile perspective," The Quarterly Review of Economics and Finance, Elsevier, vol. 100(C).
    2. Allen, Franklin & Barbalau, Adelina, 2024. "Security design: A review," Journal of Financial Intermediation, Elsevier, vol. 60(C).
    3. João Almeida & João Alves & Carlos Bettencourt & Maria Bettencourt & Madalena Borges & Filipa Castilho & Sónia Correia & Gisela Fonseca & Mariana Júdice & André Leal & Afonso Marques & Carla Marques &, 2024. "Occasional paper on Decentralised Finance," Working Papers o202402, Banco de Portugal, Economics and Research Department.
    4. Han, Jungsuk & Lee, Jongsub & Li, Tao, 2025. "A review of DAO governance: Recent literature and emerging trends," Journal of Corporate Finance, Elsevier, vol. 91(C).
    5. Mohamd Laimon & Rula Almadadha & Steven Goh, 2025. "Energy Consumption of Crypto Mining: Consequences and Sustainable Solutions Using Systems Thinking and System Dynamics Analysis," Sustainability, MDPI, vol. 17(8), pages 1-9, April.
    6. Dimitriadis, Konstantinos A. & Koursaros, Demetris & Savva, Christos S., 2024. "Evaluating the sophisticated digital assets and cryptocurrencies capacities of substituting international currencies in inflationary eras," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    7. José Zapata Sevilla, 2024. "Analysing decentralised autonomous organisations (DAOs): limits and perspective," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(4), pages 425-436, December.
    8. Adi Wolfson & Gerard Khaladjan & Yotam Lurie & Shlomo Mark, 2025. "The Greater Sustainability of Stablecoins Relative to Other Cryptocurrencies," JRFM, MDPI, vol. 18(3), pages 1-14, March.
    9. Bogdan Adamyk & Vladlena Benson & Oksana Adamyk & Oksana Liashenko, 2025. "Risk Management in DeFi: Analyses of the Innovative Tools and Platforms for Tracking DeFi Transactions," JRFM, MDPI, vol. 18(1), pages 1-31, January.
    10. Oefele, Nico & Baur, Dirk G. & Smales, Lee A., 2025. "The effect of currency risk on crypto asset utilization in Türkiye," Emerging Markets Review, Elsevier, vol. 65(C).
    11. repec:osf:osfxxx:ube2z_v1 is not listed on IDEAS

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    Keywords

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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