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Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance

Author

Listed:
  • Tim Weingärtner

    (Lucerne University of Applied Sciences and Art)

  • Fabian Fasser

    (Lucerne University of Applied Sciences and Art)

  • Pedro Reis Sá da Costa

    (Lucerne University of Applied Sciences and Art)

  • Walter Farkas

    (University of Zurich, ETH Zurich and Swiss Finance Institute)

Abstract

Decentralized finance (DeFi) promises a revolution in financial accessibility, transparency, and automation. Yet, its very novelty exposes participants to a number of additional risks and challenges. This study aims to address the risks associated with DeFi, while also conducting a comparative analysis to those of classical/traditional finance (TradFi). After introducing DeFi and its defining characteristics, such as the use of smart contracts, blockchain technology, and decentralized governance, the paper outlines the principal risks associated with DeFi. Drawing insights from an extensive literature review of 200 recent articles, of which 50 were thoroughly analyzed, the study compares risks of DeFi and TradFi, categorizing these into systematic and unsystematic risks. Furthermore, we introduce the ‘risk wheel’, an innovative tool tailored to understand and navigate the subtleties of DeFi risks, finding potential applications in risk assessment, management, and even education. This paper’s primary objective is to provide a detailed and impartial examination of the risks associated with DeFi and their comparison to traditional finance in order to assist stakeholders in making informed decisions and mitigating possible losses.

Suggested Citation

  • Tim Weingärtner & Fabian Fasser & Pedro Reis Sá da Costa & Walter Farkas, 2023. "Deciphering DeFi: A Comprehensive Analysis and Visualization of Risks in Decentralized Finance," Swiss Finance Institute Research Paper Series 23-96, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2396
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    Cited by:

    1. 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.

    More about this item

    Keywords

    decentralized finance; DeFi; risk management; literature review; risk classification; risk wheel.;
    All these keywords.

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