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Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending

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  • Saengchote, Kanis
  • Putniņš, Talis
  • Samphantharak, Krislert

Abstract

Decentralized Finance (DeFi) is built on a fundamentally different paradigm. Rather than trusting individuals and institutions, DeFi participants, in principle, only need to trust computer code enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress-tests this alternative paradigm by revealing the identities of individuals (including a convicted criminal) associated with the Abracadabra lending protocol. The revelation seriously damaged the protocol, indicating that, in practice, DeFi does not (yet) entirely remove the need for trust in individuals. Our findings suggest that smart contracts are incomplete and are subject to protocol-run risk. Thus, individuals’ character and trust remain relevant in this alternative financial system.

Suggested Citation

  • Saengchote, Kanis & Putniņš, Talis & Samphantharak, Krislert, 2023. "Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:beexfi:v:40:y:2023:i:c:s2214635023000722
    DOI: 10.1016/j.jbef.2023.100858
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    Cited by:

    1. Saengchote, Kanis & Samphantharak, Krislert, 2024. "Digital money creation and algorithmic stablecoin run," Finance Research Letters, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    DeFi; Stablecoin; Trust; Incomplete contracts; Regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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