Decentralized Finance: Protocols, Risks, and Governance
- URL: http://arxiv.org/abs/2312.01018v1
- Date: Sat, 2 Dec 2023 03:47:57 GMT
- Title: Decentralized Finance: Protocols, Risks, and Governance
- Authors: Agostino Capponi and Garud Iyengar and Jay Sethuraman
- Abstract summary: We argue how shortcomings and frictions are being mitigated by the decentralized finance (DeFi) ecosystem.
We highlight the pros and cons of the novel form of decentralized governance introduced via the ownership of governance tokens.
We conclude by emphasizing the need for future research to focus on the scalability of existing blockchains.
- Score: 7.642646077340122
- License: http://creativecommons.org/licenses/by/4.0/
- Abstract: Financial markets are undergoing an unprecedented transformation.
Technological advances have brought major improvements to the operations of
financial services. While these advances promote improved accessibility and
convenience, traditional finance shortcomings like lack of transparency and
moral hazard frictions continue to plague centralized platforms, imposing
societal costs. In this paper, we argue how these shortcomings and frictions
are being mitigated by the decentralized finance (DeFi) ecosystem. We delve
into the workings of smart contracts, the backbone of DeFi transactions, with
an emphasis on those underpinning token exchange and lending services. We
highlight the pros and cons of the novel form of decentralized governance
introduced via the ownership of governance tokens. Despite its potential, the
current DeFi infrastructure introduces operational risks to users, which we
segment into five primary categories: consensus mechanisms, protocol, oracle,
frontrunning, and systemic risks. We conclude by emphasizing the need for
future research to focus on the scalability of existing blockchains, the
improved design and interoperability of DeFi protocols, and the rigorous
auditing of smart contracts.
Related papers
- The Feasibility of a Smart Contract "Kill Switch" [0.9696996416317306]
We examine the existing mechanisms for smart contract termination across several major blockchain platforms.
We assess the compatibility of these mechanisms with the requirements of the EU Data Act.
We discuss the challenges associated with implementing the so-called smart contract "kill switches"
arXiv Detail & Related papers (2024-07-14T19:31:15Z) - MEV Ecosystem Evolution From Ethereum 1.0 [6.151915040556504]
In traditional finance, there are possibilities to create values, e.g., arbitrage offers to create value from market inefficiencies or front-running offers to extract value for the participants having privileged roles.
Such opportunities are readily available in DeFi ecosystems, where diverse participants engage in financial activities.
In this survey, first, we show how lucrative such opportunities can be. Then, we discuss how protocolfollowing participants trying to capture such opportunities threaten to sabotage blockchain's performance.
Finally, we review the current state of research trying to restore trustlessness and decentralization to provide all DeFi participants with a fair marketplace
arXiv Detail & Related papers (2024-06-19T14:22:26Z) - Decentralized Credential Status Management: A Paradigm Shift in Digital Trust [0.0]
Public key infrastructures are essential for Internet security, ensuring robust certificate management and revocation mechanisms.
The transition from centralized to decentralized systems presents challenges such as trust distribution and privacy-preserving credential management.
This paper explores the evolution of certificate status management from centralized to decentralized frameworks, focusing on blockchain technology and advanced cryptography.
arXiv Detail & Related papers (2024-06-17T13:17:56Z) - IT Strategic alignment in the decentralized finance (DeFi): CBDC and digital currencies [49.1574468325115]
Decentralized finance (DeFi) is a disruptive-based financial infrastructure.
This paper seeks to answer two main questions 1) What are the common IT elements in the DeFi?
And 2) How the elements to the IT strategic alignment in DeFi?
arXiv Detail & Related papers (2024-05-17T10:19:20Z) - Performance Analysis of Decentralized Physical Infrastructure Networks and Centralized Clouds [42.37170902465878]
Decentralized Physical Infrastructure Networks (DePINs) aim to enhance data sovereignty and confidentiality and increase resilience against a single point of failure.
This work focuses on the potential of DePINs to disrupt traditional centralized architectures by taking advantage of the Internet of Things (IoT) devices and crypto-economic design in combination with blockchains.
arXiv Detail & Related papers (2024-04-12T08:00:38Z) - Enhancing Trust and Privacy in Distributed Networks: A Comprehensive Survey on Blockchain-based Federated Learning [51.13534069758711]
Decentralized approaches like blockchain offer a compelling solution by implementing a consensus mechanism among multiple entities.
Federated Learning (FL) enables participants to collaboratively train models while safeguarding data privacy.
This paper investigates the synergy between blockchain's security features and FL's privacy-preserving model training capabilities.
arXiv Detail & Related papers (2024-03-28T07:08:26Z) - Aid Nexus : A Blockchain Based Financial Distribution System [0.7366405857677227]
By leveraging decentralized ledger systems, blockchain offers enhanced security, transparency, and transaction verification without the need for intermediaries.
The finance sector is exploring blockchain-based solutions for payments, remittances, lending, and investments.
Healthcare adopts the technology for medical record keeping, supply chain tracking, and data management.
Other sectors, including real estate, energy, and government, are also investigating blockchain-based solutions.
arXiv Detail & Related papers (2023-11-14T18:35:02Z) - A Comprehensive Study of Governance Issues in Decentralized Finance
Applications [45.033994319846244]
We present a comprehensive study of governance issues in DeFi applications.
We collect and build a dataset of 4,446 audit reports from 17 Web3 security companies.
Our findings highlight a significant observation: the disparity between smart contract code and DeFi whitepapers plays a central role in these governance issues.
arXiv Detail & Related papers (2023-11-02T17:46:59Z) - Onchain Sports Betting using UBET Automated Market Maker [45.410818354926406]
Decentralized sports betting requires automated market makers (AMMs) for efficient liquidity provision.
Existing AMMs like Uniswap lack alignment with fair odds, creating risks for liquidity providers.
The paper introduces UBET AMM (UAMM), utilizing smart contracts and algorithms to price sports odds fairly.
arXiv Detail & Related papers (2023-08-18T02:19:30Z) - Watch the Gap: Making code more intelligible to users without
sacrificing decentralization? [0.0]
We highlight the information gap that exists between users, legal bodies and the source code.
We present a spectrum of low-code to no-code initiatives that aim at bridging this gap.
This highlights the so called "Pitfall of the Trustless Dream", because arguably solutions to the information gap tend to make the system more centralized.
arXiv Detail & Related papers (2023-03-10T10:50:18Z) - Regulation conform DLT-operable payment adapter based on trustless -
justified trust combined generalized state channels [77.34726150561087]
Economy of Things (EoT) will be based on software agents running on peer-to-peer trustless networks.
We give an overview of current solutions that differ in their fundamental values and technological possibilities.
We propose to combine the strengths of the crypto based, decentralized trustless elements with established and well regulated means of payment.
arXiv Detail & Related papers (2020-07-03T10:45:55Z)
This list is automatically generated from the titles and abstracts of the papers in this site.
This site does not guarantee the quality of this site (including all information) and is not responsible for any consequences.