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FE Readings 2023 > 6. Digital and Decentralized Finance > Flashcards

6. Digital and Decentralized Finance Flashcards

1
Q

“Risks and returns of cryptocurrency”

Describe the data collection in this paper.

A

Data from Coinmarketcap.com and Coinmetrics.io

The authors focus on three major cryptocurrencies (Bitcoin, Ripple, and Ethereum) and how they relate to traditional assets (time period: 01.01.2013 – 31.05.2018).

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2
Q

“Risks and returns of cryptocurrency”

What are the features of cryptocurrency?

A

Based on fundamentally new technology, the potential of which is not fully understood
Yet fulfills similar functions as other, more traditional assets
Skewness and kurtosis on the coin market is positive
High probability of disasters and miracles

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3
Q

“Risks and returns of cryptocurrency”

What are disasters, and what are miracles? What are the probabilities of them happening?

A

A “disaster” of the daily -20% return on Bitcoin has a 0.5% probability
A “miracle” of +20% daily return has almost 1% probability

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4
Q

“Risks and returns of cryptocurrency”

What are the theories authors are testing in the paper?

A

1) cryptocurrency may serve as another medium of exchange (disproved)
2) cryptocurrency may serve as an alternative to precious metals as a store of value (partially disproved)
3) cryptocurrency has exposure to macroeconomic factors (partially disproved)
4) cryptocurrency returns can be predicted (evidence found)
5) investor attention affects cryptocurrency returns

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5
Q

“Risks and returns of cryptocurrency”

What do investors think of cryptocurrency?

A

Cryptocurrency is “digital gold”, and is a new way to store value.

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6
Q

“Risks and returns of cryptocurrency”

How can cryptocurrency returns be predicted?

A

1) time-series momentum: daily (weekly) increase in Bitcoin st. dev. predicts an increase in the following days (weeks)
2) Google proxy - higher searches for “Bitcoin”, “Ripple”, “Ethereum” in the current week compared to previous
3) Negative investor attention is followed by cryptocurrency price depreciation in the future (ratio of “Bitcoin” and “Bitcoin hack”)
4) Cryptocurrency valuation ratio (negatively predicts returns)

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7
Q

“Risks and returns of cryptocurrency”

Which variable DOES NOT WORK when predicting cryptocurrency returns?

A

Realized volatility (only significant for Ripple)

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8
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What is decentralized finance (DeFi)?

A

Decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain.

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9
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are the benefits of using smart contracts in DeFi?

A

Smart contracts provide an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by smart contracts.

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10
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are smart contracts, and how are they executed?

A

Smart contracts generally refer to small applications stored on a blockchain and executed in parallel by a large set of validators.

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11
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

How do smart contracts provide security?

A

Smart contracts will always be executed as specified and allow anyone to verify the resulting state changes independently, which provides security.

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12
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What is composability, and how does it work in DeFi?

A

Smart contracts on one blockchain, the vast majority being on Ethereum, provide composability, making it easy to build new processes based on existing ones.

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13
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are the five layers of DeFi building blocks?

A

The five layers of DeFi building blocks are the settlement layer, the asset layer, the protocol layer, the application layer, and the aggregation layer.

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14
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What is tokenization, and how does it work in DeFi?

A

Tokenization is the process of adding new assets to a blockchain, making assets more efficient to transfer.

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15
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are stablecoins, and how are they used in DeFi?

A

Stablecoins are tokens that track a real-world asset/commodity and are used in DeFi.

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16
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are the three types of collateral used in DeFi?

A

The three types of collateral used in DeFi are off-chain collateral, on-chain collateral, and no collateral.

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17
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are decentralized exchanges, and how do they work in DeFi?

A

Decentralized exchanges are used in DeFi and allow one to be in control of their own assets until the trade is executed.

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18
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are the different types of decentralized exchanges?

A

The different types of decentralized exchanges include
- decentralized order book exchanges,
- constant function market maker (CFMM)
- smart contract-liquidity pool,
- smart contract-based reserve aggregation,
- peer-to-peer protocols.

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19
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are decentralized lending platforms, and how do they work in DeFi?

A

Decentralized lending platforms allow both the lender and the borrower of the loan to remain anonymous and use smart contracts or collateral

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20
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are flash loans, and how do they work in DeFi?

A

Flash loans are an interesting option where the borrower receives the funds, uses them, and repays them, all within the same blockchain transaction.

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21
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are collateralized debt positions, and how do they work in DeFi?

A

Collateralized debt positions allow a user to create new tokens by locking cryptoassets in a smart contract and receive a stability fee - interest rate set by the community.

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22
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are collateralized debt markets, and how do they work in DeFi?

A

Collateralized debt positions allow a user to create new tokens by locking cryptoassets in a smart contract and receive a stability fee - interest rate set by the community.

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23
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What are decentralized derivatives, and how do they work in DeFi?

A

Decentralized derivatives are tokens that derive their value from an underlying asset’s value.

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24
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

How does decentralization in DeFi minimize counterparty risk?

A

Decentralization in DeFi minimizes counterparty risk by removing intermediaries and enabling trustless transactions, ensuring that parties involved in a transaction are held accountable for their actions, and providing users with full control over their assets.

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25
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What is the potential of DeFi technologies?

A

DeFi technologies have significant potential to improve the current financial system by providing an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services. However, DeFi is still in its early stages and has some big inherent issues to address.

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26
Q

“DECENTRALISED FINANCE: ON BLOCKCHAIN-AND
SMART CONTRACT-BASED FINANCIAL MARKETS”
paper by Schär, F.

What is the conclusion? (summary).

A

The text provides an overview of decentralized finance (DeFi) and its potential to transform the traditional financial industry by enabling greater financial inclusion, lower costs, and increased transparency. It highlights the key features of DeFi, including its use of blockchain technology and smart contracts, as well as the potential risks and challenges associated with this new ecosystem.

The conclusion of the text is that while there are still significant challenges and risks that need to be addressed, the growth of DeFi has the potential to reshape the financial landscape, bringing greater efficiency and accessibility to financial services. As the technology and infrastructure of DeFi continue to evolve, it is likely that we will see more innovation and new use cases emerge, further increasing its impact on the financial industry.

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27
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is the main focus of the paper?

A

Innovations in money and payments and the potential for improving the current monetary system.

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28
Q

“The Future Monetary System”
Paper by Bank of International Settlements

Why is the crypto universe unsuitable as the basis for a monetary system?

A

The crypto universe is unsuitable as the basis for a monetary system because it lacks a stable nominal anchor and limits scalability, leading to fragmentation. Crypto also relies on unregulated intermediaries, posing financial risks. Central bank money offers a sounder basis for innovation, ensuring services are stable and interoperable, domestically and across borders. New capabilities, such as programmability, composability, and tokenization, can be built on top of central bank digital currencies (CBDCs) without the structural flaws of crypto.

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29
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is DeFi, and what is its goal?

A

DeFi refers to decentralised finance and its goal is to refashion the monetary system by cutting down the intermediary to lower costs and increase efficiency.

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30
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What are the three distinct features of DeFi that can improve the current financial system?

A

Programmability, composability, and tokenization

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31
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is the security-decentralization-scalability trilemma, and why is it a pitfall of crypto?

A

It is impossible to scale as fast while maintaining security and decentralization, leading to fragmentation.

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32
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is the security-decentralization-scalability trilemma, and why is it a pitfall of crypto?

A

It is impossible to scale as fast while maintaining security and decentralization, leading to fragmentation.

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33
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is the role of the central bank in the future monetary system?

A

To provide the core of the future monetary system and support the smooth functioning of the payment system by providing sufficient liquidity for settlement.

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34
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What are the four roles of the central bank in the future monetary system?

A

Issuing central bank money, providing means for the ultimate finality of payments, supporting the smooth functioning of the payment system, and safeguarding the integrity of the payment system.

35
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What is the traditional division of labor between the central bank and private sector entities in the future monetary system?

A

The central bank provides the foundations of the system, while private sector entities conduct the customer-facing activities.

36
Q

“The Future Monetary System”
Paper by Bank of International Settlements

What are the new standards that the future monetary system builds on?

A

Application programming interfaces to ensure programmability, composability, and tokenization

37
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is CBDC, and how can it streamline a wide array of innovations?

A

CBDC stands for central bank digital currencies, and it can streamline a wide array of innovations such as multi-CBDC arrangements, a wider range of financial intermediaries, instant payments, and inclusive design.

38
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the common theme of the future monetary system?

A

Decentralization can be achieved without the structural flaws of crypto.

39
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the potential of programmability in the financial system?

A

The ability of smart contracts to automate certain actions, eliminating the middle man in different processes

40
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is composability, and how can it allow for complex multi-layered monetary system processes?

A

Composability is the capacity to combine different components in a system, which would allow for complex multi-layered monetary system processes.

41
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is tokenization, and how can it allow for quicker and more efficient transfers utilizing the blockchain system?

A

Tokenization refers to assets that are “tokenized” and can be transferred and exchanged much quicker and with more efficiency, utilizing the blockchain system.

42
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the danger of relying on unregulated intermediaries in the crypto universe?

A

They pose financial risks

43
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the issue with the lack of nominal anchor in crypto?

A

Crypto has to borrow it off-chain from real-world currencies.

44
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the tendency to centralization in crypto, and why is it a flaw?

A

A lot of decisions are made through governance tokens with centralized control, and most of the trading occurs on centralized exchanges, creating significant risks of rug pulling or unprofessionalism

45
Q

“The Future Monetary System”
Paper by Bank of International Settlements.

What is the advantage of a system grounded in central bank money?

A

It offers a sounder basis for innovation, ensuring that services are stable and interoperable, domestically and across borders.

46
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the functions of the financial system?

A

The financial system performs functions such as allocating resources to their most productive use, moving capital from agents with surpluses to those with deficits, and providing efficient means for moving wealth across time and states.

47
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are intermediaries and what functions do they serve in the financial system?

A

Intermediaries such as banks, brokers, and exchanges serve as centralized nodes that guard the access to the financial system and provide customers with essential services such as record keeping, verification of transactions, settlement, liquidity, and security.

48
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the blockchain technology and how does it offer a different financial architecture?

A

Blockchain technology offers the possibility of a completely different financial architecture, called Decentralized Finance (DeFi), where record keeping is decentralized, access to the system is anonymous and unrestricted, and any form of intermediation would be built on top of it.

49
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the potential benefits of the blockchain architecture?

A

The blockchain architecture can eliminate unnecessary intermediaries and potentially be a significant benefit for the financial system’s efficiency.

50
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the challenges of DeFi solutions, and what are some proposed solutions?

A

Challenges include issues with security protocols, the potential for negative externalities on smaller networks, and the added complexity of smart contracts. Proposed solutions include creating economic incentives for decentralization and addressing challenges for consumer financial protection.

51
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the potential impact of smart contracts on financially less sophisticated consumers?

A

It could severely affect market participation of less sophisticated consumers, or these customers would have to find trusted intermediaries to act on their behalf.

52
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the downside of smart contracts having limited means to test a person’s financial sophistication or mental capacity?

A

The enforcement of these contracts could lead to undesirable outcomes if there is no provision to reverse the outcome as in traditional contract law.

53
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

When is using smart contracts beneficial?

A

When both parties to a contract are sure that they do not value any ex-post protection through contract laws.

54
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the downside of smart contracts being written in fully defined computer code?

A

They cannot be modified once executed.

55
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the market share of Bitcoin in the group of non-smart contract cryptocurrencies?

A

According to the paper, Bitcoin dominates the group of non-smart contract cryptocurrencies with a market share of more than 90%.

56
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the group of non-stablecoins?

A

The group of non-stablecoins is a large and diverse group of cryptocurrencies whose value depends on the current investor sentiment and fluctuates widely over time.

57
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the cryptocurrencies that have no other function than being a cryptocurrency?

A

The cryptocurrencies that have no other function than being a cryptocurrency are the first generation of cryptocurrencies such as Bitcoin, Litecoin, etc. These cryptocurrencies are built on non-smart contract platforms.

58
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the new narrative for the benefits of the first generation of cryptocurrencies?

A

The new narrative for the benefits of the first generation of cryptocurrencies is that they are positioned as the new “gold” — a digital store of value.

59
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Who created Dogecoin and for what purpose?

A

Dogecoin was created in 2013 by two software engineers Billy Markus and Jackson Palmer as a parody of a cryptocurrency that was meant to be worthless.

60
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Why can a financial system still be inefficient even if it limits economic rents?

A

High transaction costs can still make the financial system inefficient.

61
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are some of the inefficiencies of the traditional financial system?

A

High cost of banking services and long settlement time of transactions.

62
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Where do a substantial part of the costs of traditional banks come from?

A

The need to cover brick-and-mortar costs and outdated infrastructure.

63
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are some of the limitations for banks to invest in new technologies?

A

Centralized intermediaries can have limited incentives to invest in new technologies that could threaten their centralized position.

64
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What has been the effect of blockchain technology on the financial industry?

A

It has had a positive effect on the incentives of financial industry to upgrade its infrastructure and reduce costs.

65
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Can a permissioned blockchain deliver a more cost-efficient solution than a permissionless one?

A

Yes, arguments can be made that a permissioned blockchain could deliver a more cost-efficient and robust solution.

66
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Why is it not easy to create an improved version of a blockchain protocol?

A

Competition can be limited between different protocols because of strong network externalities and miners/validators can earn rent in equilibrium.

67
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Can blockchain function completely devoid of human intervention?

A

No, even if the execution of transactions and smart contracts on the blockchain are automated, the rules governing the blockchain itself and any upgrades to the system must be agreed upon and implemented by its participants.

68
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Who are the major stakeholders in a blockchain ecosystem?

A

The major stakeholders in a blockchain ecosystem are the core developers who write and update the code, validators who verify transactions, token holders who are investors or equity holders, and users of the platform.

69
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Do stakeholders have completely aligned incentives in the crypto space?

A

No, the incentives of stakeholders are not always completely aligned. Users and developers might want fees on the blockchain to be low, while investors and validators want to maximize their financial return.

70
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the decentralized autonomous organization (DAO)?

A

The DAO is a new form of governance in decentralized finance that tries to avoid placing trust in any actor or institution, including the legal ones. It spreads control over decisions among all interested stakeholders and is done by issuing special “governance” tokens that give holders the power to propose changes to the protocol and vote on them.

71
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Does a transparent and verifiable governance process ensure good governance?

A

No, any DAO design faces the same fundamental trade-offs and issues as traditional organizations. Decision making in a fully decentralized organization can be inefficient, investors with large stakes can capture the control and impose their preference on the system, and the voting system can give more power to participants who may only be interested in maximizing short term profits as opposed to developing the protocol towards innovative use cases.

72
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is fractional reserve banking?

A

When banks only hold a fraction of deposits in reserve and lend out the rest to borrowers to expand economic activities.

73
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is narrow banking?

A

A banking model where every loan is overcollateralized, removing many of the problems faced by fractional reserve systems.

74
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the main risk with stablecoins?

A

A potential run on stablecoins, which can occur due to investors’ doubts about the quality of the collateral.

75
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the concern with algorithmic stablecoins?

A

The complexity and potential fragility of the system, as they are not fully backed by safe assets.

76
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is a source of systemic risk in the crypto ecosystem?

A

The ability to establish highly leveraged positions, which can exacerbate volatility and lead to sharp drops in cryptocurrency prices.

77
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the complication DeFi adds to the crypto ecosystem?

A

Many DeFi protocols facilitate leverage and accept other protocols’ tokens as collateral, resulting in a highly complex and potentially fragile system.

78
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the potential benefits and challenges of DeFi?

A

DeFi has the potential to reduce transaction costs, but it may also create additional problems, such as facilitating tax evasion or skirting AML laws.

79
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the economic forces and frictions that can arise within the DeFi system?

A

DeFi architecture might have the potential to reduce transaction costs, but it is not an automatic solution to the problem of rents in the financial sector.

80
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What is the key challenge to regulators when it comes to DeFi?

A

The permissionless and anonymous nature of DeFi blockchains provide the opportunity for market participants to circumvent controls in the financial system, and create externalities for the rest of society.

81
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the potential solutions to regulate the DeFi system?

A

Regulating the DeFi system would rely on a system where validators on the blockchain agree to check if a particular address belongs to a certified entity, and validators would be charged with only processing transactions that involve certified addresses.

82
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

Why is it important to set standards that protect consumers and maintain the transparency, accountability and stability of the system?

A

The cross-jurisdictional structure of permissionless blockchain ledgers entails a danger that participants will engage in regulatory arbitrage which would undermine the financial system and its stability.

83
Q

Makarov, Igor and Antoinette Schoar, 2022, Cryptocurrencies and Decentralized Finance (DeFi)

What are the consequences of how the DeFi system evolves, in terms of technology and regulation?

A

The way the DeFi system evolves has important consequences for liquidity and credit provision to the economy, and ultimately the standing of the US and other global economies. There are also strategic and competitive implications across countries.

FE Readings 2023 (10 decks)

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