Cryptocurrencies and decentralized finance (DeFi)

Makarov, Igor and Schoar, Antoinette (2022) Cryptocurrencies and decentralized finance (DeFi). Brookings Papers on Economic Activity, 2022-S. pp. 141-215. ISSN 0007-2303

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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.

Item Type:	Article
Official URL:	https://muse.jhu.edu/journal/52
Additional Information:	© 2022 The Brookings Institution.
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Date Deposited:	05 Jan 2023 10:24
Last Modified:	18 Apr 2024 04:57
URI:	http://eprints.lse.ac.uk/id/eprint/117711

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