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Decentralized lending and its users: Insights from compound

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  • Saengchote, Kanis

Abstract

Permissionless blockchains offer an information environment where users can interact privately without fear of censorship. Financial services can be programmatically coded via smart contracts to automate transactions without the need for human intervention or knowing users’ identities. This new paradigm is known as decentralized finance (DeFi). We investigate Compound – a leading DeFi lending protocol – to show how it works in this novel information environment, who its users are, and what factors determine their participation. On-chain transaction data shows that loan durations are short (31 days on average), and many users borrow to support leveraged investment strategies (yield farming). We show that systemic risk in DeFi can arise from concentration and interconnection and how traditional risk management practices can be challenging for DeFi.

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  • Saengchote, Kanis, 2023. "Decentralized lending and its users: Insights from compound," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:intfin:v:87:y:2023:i:c:s1042443123000756
    DOI: 10.1016/j.intfin.2023.101807
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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).
    2. Cornelli, Giulio & Gambacorta, Leonardo & Garratt, Rodney & Reghezza, Alessio, 2024. "Why DeFi lending? Evidence from Aave V2," CEPR Discussion Papers 19358, C.E.P.R. Discussion Papers.
    3. 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).
    4. Natkamon Tovanich & Myriam Kassoul & Simon Weidenholzer & Julien Prat, 2023. "Contagion in Decentralized Lending Protocols: A Case Study of Compound," Post-Print hal-04221228, HAL.
    5. Iveta Grigorova & Aleksandar Karamfilov & Radostin Merakov & Aleksandar Efremov, 2023. "Simulation of Dynamic Performance of DeFi Protocol Based on Historical Crypto Market Behavior," Risks, MDPI, vol. 12(1), pages 1-20, December.

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