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Decentralized Finance (DeFi) : Foundations, Applications, Potentials, and Challenges

Title data

Gramlich, Vincent ; Principato, Marc ; Schellinger, Benjamin ; Sedlmeir, Johannes ; Amend, Julia ; Stramm, Jan ; Zwede, Till ; Strüker, Jens ; Urbach, Nils:
Decentralized Finance (DeFi) : Foundations, Applications, Potentials, and Challenges.
2022

Official URL: Volltext

Project information

Project title:
Project's official titleProject's id
Projektgruppe WI BLockchain-LaborNo information
Projektgruppe WI Digital FinanceNo information

Abstract in another language

Bitcoin and other cryptocurrencies built on blockchains have increasingly attracted investors in recent years. Motivated by the opportunities of this technology, blockchain-based applications in various sectors have also been explored. Yet, so far, finance-related applications have arguably remained the most advanced and relevant area of blockchain usage. The resulting financial ecosystem based on blockchains as infrastructure is often referred to as decentralized finance (DeFi). DeFi integrates not only basic payment functionalities, but also provides highly complex applications that interconnect different building blocks and services. These features result in the creation of an open, trustless, composable, and permissionless financial ecosystem. Protocols built on blockchains, i.e., smart contracts, facilitate automation and highly customizable DeFi applications. Thus, smart contracts enable a wide range of financial services such as digital assets (e.g., stablecoins and derivatives), participation mechanisms (e.g., governance in decentralized autonomous organizations (DAOs)), and investment opportunities (e.g., non-fungible tokens (NFTs) and fractional ownership). Proponents of DeFi argue that removing central entities in the value chain of traditional finance (TradFi) improves access to financial services, lowers transaction costs, increases flexibility, and drives innovation. However, the nascent stage of DeFi still poses major risks and challenges: Regulatory bodies are looking for means to prevent money laundering and to hold entities accountable for misbehavior. Also, the transparent nature of blockchains raises questions regarding compliance with data protection and related privacy regulations. Bridging cryptocurrencies, DeFi-based transactions, and the real world is another multi-faced challenge. Furthermore, security and scalability issues hamper the development of promising applications. The current scalability issues, for example, cause high transaction costs that make DeFi less attractive or unusable for non-affluent users, undermining the value proposition of DeFi. Understanding DeFi’s potentials and challenges is a crucial prerequisite to seize business opportunities early on. In addition, it is imperative to educate investors, policy-makers, and users about the principles of DeFi. Moreover, innovation from DeFi has arguably inspired many other sectors. Thus, the technical innovations in DeFi can facilitate decentralized applications (DApps) in various domains, e.g., payments using central bank digital currencies (CBDCs) or verifiable supply chains. Blockchain and smart contracts can allow companies to freely capitalize on composable, trustless, and permissionless DeFi protocols to build and offer innovative products and services. The goal of our study is to shed light on DeFi and provide experts and non-experts with the required knowledge to comprehensively understand this emerging phenomenon. In addition, we discuss potentials, but also existing challenges of DeFi and present solutions and measures for risk mitigation. We hope readers enjoy this study and welcome questions, discussions, and suggestions for improvement.

Further data

Item Type: Other (Other)
Keywords: Blockchain; Cryptocurrency; Decentralized Finance; DeFi; Digital Wallet; Finance; Financial Services; Metaverse; NFT; Smart Contracts; Token
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Business Administration
Faculties > Faculty of Law, Business and Economics > Department of Business Administration > Professor Information Systems and Digital Energy Management
Faculties > Faculty of Law, Business and Economics > Department of Business Administration > Professor Information Systems and Digital Energy Management > Professor Information Systems and Digital Energy Management - Univ.-Prof. Dr. Jens Strüker
Research Institutions
Research Institutions > Affiliated Institutes
Research Institutions > Affiliated Institutes > Fraunhofer Project Group Business and Information Systems Engineering
Research Institutions > Affiliated Institutes > FIM Research Center Finance & Information Management
Faculties
Faculties > Faculty of Law, Business and Economics
Result of work at the UBT: Yes
DDC Subjects: 000 Computer Science, information, general works > 004 Computer science
300 Social sciences > 330 Economics
Date Deposited: 07 Sep 2022 06:02
Last Modified: 29 Nov 2022 06:50
URI: https://eref.uni-bayreuth.de/id/eprint/71740