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Cryptocurrencies and Decentralized Finance (DeFi)

Author

Listed:
  • Igor Makarov

    (London School of Economics)

  • Antoinette Schoar

    (MIT Sloan School of Management)

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

  • Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralized Finance (DeFi)," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(1 (Spring), pages 141-215.
    • Handle: RePEc:bin:bpeajo:v:53:y:2022:i:2022-01:p:141-215
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    File URL: https://www.brookings.edu/bpea-articles/cryptocurrencies-and-decentralized-finance-defi/
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