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

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  • Kanis Saengchote
  • Talis Putnic{n}v{s}
  • Krislert Samphantharak

Abstract

Decentralized Finance (DeFi) is built on a fundamentally different paradigm: rather than having to trust individuals and institutions, participants in DeFi potentially only have to trust computer code that is 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 associated with a DeFi protocol, including a convicted criminal. We find that, in practice, DeFi does not (yet) fully remove the need for trust in individuals. Our findings suggest that that because smart contracts are incomplete, they are subject to run risk (Allen and Gale, 2004) and personal character and trust of individuals are still relevant in this alternative financial system.

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  • Kanis Saengchote & Talis Putnic{n}v{s} & Krislert Samphantharak, 2022. "Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending," Papers 2207.06285, arXiv.org.
    • Handle: RePEc:arx:papers:2207.06285
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    References listed on IDEAS

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    Cited by:

    1. Kanis Saengchote, 2022. "Decentralized lending and its users: Insights from Compound," Papers 2212.05734, arXiv.org.

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