The Know-how of Decentralized Finance (DeFi)

Raphael Auer, Bernhard Haslhofer, Stefan Kitzler, Pietro Saggese and Friedhelm Victor in this BIS paper:

Decentralized Finance (DeFi) is a brand new monetary paradigm that leverages distributed ledger applied sciences to supply companies akin to lending, investing, or exchanging cryptoassets with out counting on a standard centralized middleman. A spread of DeFi protocols implements these companies as a set of sensible contracts, ie software program packages that encode the logic of typical monetary operations. As a substitute of transacting with a counterparty, DeFi customers thus work together with software program packages that pool the assets of different DeFi customers to take care of management over their funds.

This paper supplies a deep dive into the general structure, the technical primitives, and the monetary functionalities of DeFi protocols. We analyse and clarify the person parts and the way they work together via the lens of a DeFi stack reference (DSR) mannequin that includes three layers: settlement, purposes and interfaces. We focus on the technical features of every layer of the DSR mannequin. Then, we describe the monetary companies for essentially the most related DeFi classes, ie decentralized exchanges, lending protocols, derivatives protocols and aggregators.

The latter exploit the property that sensible contracts may be “composed”, ie make the most of the functionalities of different protocols to offer novel monetary companies. We focus on how composability permits complicated monetary merchandise to be assembled, which might have purposes within the conventional monetary business. We focus on potential sources of systemic threat and conclude by mapping out an agenda for analysis on this space.

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