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Occasional paper on Decentralised Finance

Author

Listed:
  • João Almeida
  • João Alves
  • Carlos Bettencourt
  • Maria Bettencourt
  • Madalena Borges
  • Filipa Castilho
  • Sónia Correia
  • Gisela Fonseca
  • Mariana Júdice
  • André Leal
  • Afonso Marques
  • Carla Marques
  • Carlos Martins
  • Katja Neugebauer
  • Anaísa Oliveira
  • Céline Pereira
  • Joana Pratas
  • Leonor Queiró
  • Ricardo Sá
  • Joana Santos
  • Dina Teixeira
  • Pedro Tomés
  • Isabel Vasconcelos

Abstract

Decentralised Finance (DeFi) has gained significant attention in recent years. It aims to replicate the functions of the traditional financial system in a disintermediated way leveraging on the interplay between blockchain technology, smart contracts and stablecoins. This paper provides an overview of the underlying components of this relatively new ecosystem, as well as its associated risks from the perspective of a financial supervisory authority. While DeFi inherits the risks present in traditional finance, some of these risks could be amplified due to the lack of a clear regulatory framework and the intrinsic features of the DeFi space. Therefore, this paper also takes a closer look at the regulatory challenges involved, including the promise of self-regulation, and explores potential avenues for addressing these challenges without stifling the innovation that DeFi can foster.

Suggested Citation

  • João Almeida & João Alves & Carlos Bettencourt & Maria Bettencourt & Madalena Borges & Filipa Castilho & Sónia Correia & Gisela Fonseca & Mariana Júdice & André Leal & Afonso Marques & Carla Marques &, 2024. "Occasional paper on Decentralised Finance," Working Papers o202402, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:o202402
    as

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    File URL: https://www.bportugal.pt/sites/default/files/documents/2024-08/OP202402_0.pdf
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    References listed on IDEAS

    as
    1. Fabian Schär, 2021. "Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets," Review, Federal Reserve Bank of St. Louis, vol. 103(2), pages 153-174, April.
    2. Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralized Finance (DeFi)," NBER Working Papers 30006, National Bureau of Economic Research, Inc.
    3. Raphael Auer & Bernhard Haslhofer & Stefan Kitzler & Pietro Saggese & Friedhelm Victor, 2024. "The technology of decentralized finance (DeFi)," Digital Finance, Springer, vol. 6(1), pages 55-95, March.
    4. Avner Shared & John Sutton, 1981. "The Self-Regulating Profession," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 217-234.
    5. Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralized Finance (DeFi)," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 53(1 (Spring), pages 141-215.
    6. Maria Demertzis & Catarina Martins, 2023. "Decentralised finance- good technology, bad finance," Bruegel Policy Brief node_8930, Bruegel.
    7. 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.
    8. Sirio Aramonteand & Wenqian Huang & Andreas Schrimpf, 2021. "DeFi risks and the decentralisation illusion," BIS Quarterly Review, Bank for International Settlements, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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