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Risk analysis in decentralized finance (DeFi): a fuzzy-AHP approach

Author

Listed:
  • Sandeepa Kaur

    (Jagannath International Management School)

  • Simarjeet Singh

    (Great Lakes Institute of Management)

  • Sanjay Gupta

    (Panjab University)

  • Sangeeta Wats

    (Narsee Monjee Institute of Management Studies University, (NMIMS University))

Abstract

Decentralized finance is disrupting the financial ecosystem through innovative, transparent, and interoperable financial solutions. Based on distributed ledger technology, decentralized finance is a nascent and rapidly evolving area. Decentralized finance protocols are witnessing a perfect storm (in terms of growth). However, this emerging area needs sober consideration as these financial technologies possess unique risks for users, makers, regulators, and other stakeholders. The current research aims to identify and prioritize risks in decentralized finance. The present study conducted an extensive survey of the literature to identify various risks involved in decentralized finance. For empirical analysis, the study collected data from 90 experts. A fuzzy analytical hierarchical process (F-AHP) was applied to prioritize various risks in decentralized finance. Pairwise comparison and weights of all the criteria and sub-criteria revealed that technical risks are the most significant ones, followed by legal, regulatory, and financial risks. Among the sub-risks, financial risks are at the highest level, followed by smart contract risks and transaction risks. The outcomes of this research have several implications for regulators, policymakers, entrepreneurs, technologists, and practitioners. These stakeholders can focus on these vulnerabilities and offer more sustained solutions in the future.

Suggested Citation

  • Sandeepa Kaur & Simarjeet Singh & Sanjay Gupta & Sangeeta Wats, 2023. "Risk analysis in decentralized finance (DeFi): a fuzzy-AHP approach," Risk Management, Palgrave Macmillan, vol. 25(2), pages 1-29, June.
    • Handle: RePEc:pal:risman:v:25:y:2023:i:2:d:10.1057_s41283-023-00118-0
    DOI: 10.1057/s41283-023-00118-0
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    References listed on IDEAS

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    1. Muskan Sachdeva & Ritu Lehal & Sanjay Gupta & Aashish Garg, 2021. "What make investors herd while investing in the Indian stock market? A hybrid approach," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 15(1), pages 19-37, September.
    2. Simarjeet Singh & Nidhi Walia & Sivagandhi Saravanan & Preeti Jain & Avtar Singh & Jinesh jain, 2021. "Mapping the scientific research on alternative momentum investing: a bibliometric analysis," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 38(4), pages 619-636, April.
    3. Sood, Kirti & Singh, Simarjeet & Behl, Abhishek & Sindhwani, Rahul & Kaur, Sandeepa & Pereira, Vijay, 2023. "Identification and prioritization of the risks in the mass adoption of artificial intelligence-driven stable coins: The quest for optimal resource utilization," Resources Policy, Elsevier, vol. 81(C).
    4. Gaurav Kumar Badhotiya & Shwetank Avikal & Gunjan Soni & Neeraj Sengar, 2021. "Analyzing barriers for the adoption of circular economy in the manufacturing sector," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 71(3), pages 912-931, June.
    5. Giulio Caldarelli, 2021. "Wrapping trust for interoperability. A study of wrapped tokens," Papers 2109.06847, arXiv.org.
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    Cited by:

    1. Proelss, Juliane & Sévigny, Stéphane & Schweizer, Denis, 2023. "GameFi: The perfect symbiosis of blockchain, tokens, DeFi, and NFTs?," International Review of Financial Analysis, Elsevier, vol. 90(C).
    2. Andry Alamsyah & Gede Natha Wijaya Kusuma & Dian Puteri Ramadhani, 2024. "A Review on Decentralized Finance Ecosystems," Future Internet, MDPI, vol. 16(3), pages 1-29, February.

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