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Decentralized Finance - The Possibilities of a Blockchain "Money Lego" System

Author

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  • Tamás Katona

    (Magyar Nemzeti Bank)

Abstract

With the adoption of blockchain technology, initiatives to provide financial, investment and insurance services to a wide range of users in a decentralized manner have emerged. But can decentralized finance be the alternative to the traditional financial system, or has it only created another "technology playground" for users who are biasedly enthusiastic about crypto-assets? The study examines the key definitions of decentralized finance and then synthesizes them to formulate a new, more complete definition. This is followed by a presentation of the different layers of decentralized finance and their prevalence, as well as an analysis of its benefits and risks. In the conclusions, the author finds that decentralized finance has the potential to provide financial services with an open, transparent and robust infrastructure, and has the possibility of reaching a broad range of users with its basic financial services. However, this requires further development of the sector and effective management of emerging risks.

Suggested Citation

  • Tamás Katona, 2021. "Decentralized Finance - The Possibilities of a Blockchain "Money Lego" System," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(1), pages 74-102.
    • Handle: RePEc:mnb:finrev:v:20:y:2021:i:1:p:74-102
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    File URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-20-1-st3-katona.pdf
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    References listed on IDEAS

    as
    1. Bullmann, Dirk & Klemm, Jonas & Pinna, Andrea, 2019. "In search for stability in crypto-assets: are stablecoins the solution?," Occasional Paper Series 230, European Central Bank.
    2. Lin William Cong & Zhiguo He, 2019. "Blockchain Disruption and Smart Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1754-1797.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nadia Pocher & Mirko Zichichi & Fabio Merizzi & Muhammad Zohaib Shafiq & Stefano Ferretti, 2023. "Detecting anomalous cryptocurrency transactions: An AML/CFT application of machine learning-based forensics," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-17, December.
    2. Vincent Gramlich & Tobias Guggenberger & Marc Principato & Benjamin Schellinger & Nils Urbach, 2023. "A multivocal literature review of decentralized finance: Current knowledge and future research avenues," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-37, December.
    3. Christoph Burger & Jens Weinmann, 2022. "Blockchain Platforms in Energy Markets—A Critical Assessment," JRFM, MDPI, vol. 15(11), pages 1-18, November.
    4. Şoiman, Florentina & Dumas, Jean-Guillaume & Jimenez-Garces, Sonia, 2023. "What drives DeFi market returns?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    5. Piñeiro-Chousa, Juan & López-Cabarcos, M. Ángeles & Sevic, Aleksandar & González-López, Isaac, 2022. "A preliminary assessment of the performance of DeFi cryptocurrencies in relation to other financial assets, volatility, and user-generated content," Technological Forecasting and Social Change, Elsevier, vol. 181(C).
    6. Florentina Șoiman & Jean-Guillaume Dumas & Sonia Jimenez-Garces, 2022. "The return of (I)DeFiX [Le rendement de (I)DeFiX]," Working Papers hal-03625891, HAL.
    7. Piñeiro-Chousa, Juan & Šević, Aleksandar & González-López, Isaac, 2023. "Impact of social metrics in decentralized finance," Journal of Business Research, Elsevier, vol. 158(C).
    8. Christian Zeiß & Myriam Schaschek & Lisa Straub & Christoph Tomitza & Axel Winkelmann, 2024. "Re-intermediation of the crypto asset ecosystem by banks: An empirical study on acceptance drivers among the populace," Electronic Markets, Springer;IIM University of St. Gallen, vol. 34(1), pages 1-24, December.
    9. Florentina c{S}oiman & Guillaume Dumas & Sonia Jimenez-Garces, 2022. "The return of (I)DeFiX," Papers 2204.00251, arXiv.org.
    10. Jan Schwiderowski & Asger Balle Pedersen & Jonas Kasper Jensen & Roman Beck, 2023. "Value creation and capture in decentralized finance markets: Non-fungible tokens as a class of digital assets," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-16, December.

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    More about this item

    Keywords

    blockchain; decentralized finance; Ethereum; crypto-assets; smart contract; yield farming; liquidity mining;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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