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Cryptocurrencies and decentralized finance (DeFi)

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  • Makarov, Igor
  • Schoar, Antoinette

Abstract

The paper provides an overview of cryptocurrencies and decentralized finance (DeFi). The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system of financial intermediation. Our analysis highlights that while the DeFi architecture might have the potential to reduce transaction costs, similar to the traditional financial system, there are several layers where rents can accumulate due to endogenous constraints to competition. We show that the permissionless and pseudonymous design of DeFi generates challenges for enforcing tax compliance and anti–money laundering laws and preventing financial malfeasance. We highlight ways to regulate the DeFi system which would preserve a majority of benefits of the underlying blockchain architecture but support accountability and regulatory compliance.

Suggested Citation

  • Makarov, Igor & Schoar, Antoinette, 2022. "Cryptocurrencies and decentralized finance (DeFi)," LSE Research Online Documents on Economics 117711, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:117711
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    File URL: http://eprints.lse.ac.uk/117711/
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    Cited by:

    1. José Zapata Sevilla, 2024. "Analysing decentralised autonomous organisations (DAOs): limits and perspective," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(4), pages 425-436, December.

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    Keywords

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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