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Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain

Author

Listed:
  • Ziqiao Ao
  • Lin William Cong
  • Gergely Horvath
  • Luyao Zhang

Abstract

Decentralized finance (DeFi) has the potential to disrupt centralized finance by validating peer-to-peer transactions through tamper-proof smart contracts, thus significantly lowering the transaction cost charged by financial intermediaries. However, the actual realization of peer-to-peer transactions and the levels and effects of decentralization are largely unknown. Our research pioneers a blockchain network study that applies social network analysis to measure the level, dynamics, and impacts of decentralization in DeFi token transactions on the Ethereum blockchain. First, we find a significant core-periphery structure in the AAVE token transaction network where the cores include the two largest centralized crypto exchanges. Second, we provide evidence that multiple network features consistently characterize decentralization dynamics. Finally, we document that a more decentralized network significantly predicts a higher return and lower volatility of the decentralized market of AAVE tokens on the Ethereum blockchain. We point out that our approach is seminal for inspiring future extensions related to the facets of application scenarios, research questions, and methodologies on the mechanics of blockchain decentralization.

Suggested Citation

  • Ziqiao Ao & Lin William Cong & Gergely Horvath & Luyao Zhang, 2022. "Is decentralized finance actually decentralized? A social network analysis of the Aave protocol on the Ethereum blockchain," Papers 2206.08401, arXiv.org, revised Nov 2023.
    • Handle: RePEc:arx:papers:2206.08401
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    File URL: http://arxiv.org/pdf/2206.08401
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    References listed on IDEAS

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    1. Anand, Kartik & Gai, Prasanna & Kapadia, Sujit & Brennan, Simon & Willison, Matthew, 2013. "A network model of financial system resilience," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 219-235.
    2. Di Maggio, Marco & Kermani, Amir & Song, Zhaogang, 2017. "The value of trading relations in turbulent times," Journal of Financial Economics, Elsevier, vol. 124(2), pages 266-284.
    3. Polovnikov, Kirill & Kazakov, Vlad & Syntulsky, Sergey, 2020. "Core–periphery organization of the cryptocurrency market inferred by the modularity operator," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 540(C).
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    Cited by:

    1. Saengchote, K & Castro-Iragorri, C, 2023. "Network Topology in Decentralized Finance," Documentos de Trabajo 20782, Universidad del Rosario.
    2. Xiao, Yunpeng & Deng, Bufan & Chen, Siqi & Zhou, Kyrie Zhixuan & LC, RAY & Zhang, Luyao & Tong, Xin, 2023. ""Centralized or Decentralized?": Concerns and Value Judgments of Stakeholders in the Non-Fungible Tokens (NFTs) Market," OSF Preprints evz4p, Center for Open Science.
    3. Yan, Tao & Li, Shengnan & Kraner, Benjamin & Zhang, Luyao & Tessone, Claudio J., 2024. "Analyzing Reward Dynamics and Decentralization in Ethereum 2.0: An Advanced Data Engineering Workflow and Comprehensive Datasets for Proof-of-Stake Incentives," OSF Preprints 6ceuz, Center for Open Science.
    4. Yunpeng Xiao & Bufan Deng & Siqi Chen & Kyrie Zhixuan Zhou & Ray LC & Luyao Zhang & Xin Tong, 2023. ""Centralized or Decentralized?": Concerns and Value Judgments of Stakeholders in the Non-Fungible Tokens (NFTs) Market," Papers 2311.10990, arXiv.org, revised Nov 2023.

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