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Efficiency and Security in DeFi Lending

Author

Listed:
  • Sylvain Carré

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Franck Gabriel

    (LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

We construct a tractable general equilibrium model of DeFi lending to shed light on the role of pricing rules. We determine how the rule controls key equilibrium variables such as the utilization rate. Our model delivers a measure of welfare which incorporates the DeFi borrowing rate and the security of the underlying (Proof-of-Stake) blockchain, which we use to find welfare-maximizing pricing rules. Using a genuine function of the utilization rate becomes meaningful when there is parameter uncertainty. We establish conditions under which the first-best can be implemented by such a function, which we exhibit explicitly. When these conditions are not met, allowing the rule to also depend on the staking level restores efficiency. Our analysis leads to several other practical recommendations and conceptual clarifications.

Suggested Citation

  • Sylvain Carré & Franck Gabriel, 2022. "Efficiency and Security in DeFi Lending," Working Papers hal-04867554, HAL.
    • Handle: RePEc:hal:wpaper:hal-04867554
    as

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