Mitigating risks in decentralized finance

A Systematic review of challenges and solutions

Authors

  • Anissa Cedra Faculty of economics, commercial and management sciences, Department of economics Traditional industries laboratory, University of Algiers 3, Algeria

Keywords:

Traditional Finance (TradFi), Decentralized Finance (DeFi), Total Value Locked (TVL), Blockchain, Financial Technology (FinTech)

Abstract

The present research investigation thoroughly investigates decentralized finance (DeFi), addressing its core ideas, and different protocols, in addition to its implications within the financial system. The study aims to explicate the functionality and interoperability of various DeFi applications, including decentralized lending, automated market makers, yield farming, and stablecoin mechanisms. The methods included a literature review along with a synthesis of existing research and empirical data from prominent DeFi platforms such as Synthetix, MakerDAO, Uniswap, Aave, and Yearn Finance. The findings highlighted the decentralized characteristics and innovative abilities of DeFi protocols toward supplying financial services without traditional intermediaries. Significant conclusions encompass Synthetix's collateralization procedures, MakerDAO's DAI stability features, Uniswap's automated liquidity provision, Aave's lending and borrowing dynamics, as well as Yearn Finance's yield optimization strategies. The analysis, additionally, emphasized the volatility and resilience factors affecting Total Value Locked (TVL) in the DeFi sector, influenced by cryptocurrency market fluctuations and operational risks. In summary, this research advances the understanding of DeFi's evolution, problems, and detrimental potential for transforming global the financial sector.

References

Alamsyah, A., & Farid Muhammad, I. (2024, February 14). Unraveling the crypto market: A journey into decentralized finance. (ScienceDirect, Éd.) Digital Business, 4(100074), pp. 1-12.

Angeris, G., Chitra, T., Evans, A., & Lorig, M. (2023). Short Communication: A Primer on Perpetuals. SIAM Journal on Financial Mathematics, 14(1), PP. 1-13.

Banaeian Far, S., Imani Rad, A., & Rajabzadeh Asaar, M. (2023, June 16). Blockchain and its derived technologies shape the future generation of digital businesses: a focus on decentralized finance and the Metaverse. (ScienceDirect, Éd.) Data Science and Management, 6, pp. 183–197.

Chen, Y., & Bellavitis, C. (2020). Blockchain disruption and decentralized finance: The rise of decentralized business models. (ScienceDirect, Éd.) Journal of Business Venturing Insights, 13(e00151), pp. 1-11.

Dotan, M., Yaish, A., Yin, H.-C., Tsytkin, E., & Zohar, A. (2023). The Vulnerable Nature of Decentralized Governance in DeFi. In DeFi 2023 - Proceedings of the 2023 Workshop on Decentralized Finance and Security.

Friesendorf, C., & Blütener, A. (2023). Decentralized Finance (DeFi) How Decentralized Applications (dApps) Disrupt Banking. (ScienceDirect, Éd.) Switzerland: Elsevier Inc.

Jeong, Y., Jeoung, C., Jeong, H., Han, S., & Kim, J. (2023). Efficient Liquidity Providing via Margin Liquidity. In 2023 IEEE International Conference on Blockchain and Cryptocurrency, ICBC 2023.

Kaur, G., Lashkari, A., Sharafaldin, I., & Lashkari, Z. (2023). Understanding Cybersecurity Management in Decentralized Finance - Challenges, Strategies, and Trends. (ScienceDirect, Éd.) Switzerland: Elsevier Inc.

Majumdar, S., & Gochhait, S. (2022). Risks and Solutions in Islamic Decentralised Finance. In 2022 International Conference on Sustainable Islamic Business and Finance, SIBF 2022.

Miller, T., Cao , S., Foth , M., Boyen, X., & Powell, W. (2023, February 7). An asset-backed decentralised finance instrument for food supply chains – A case study from the livestock export industry. (ScienceDirect, Éd.) Computers in Industry, 147(103863), pp. 1-13.

Moro-Visconti, R., & Cesaretti, A. (2023). Digital Token Valuation Cryptocurrencies, NFTs, Decentralized Finance, and Blockchains. Switzerland.

Puschmann, T., & Huang-Sui, M. (2024, January 14). A taxonomy for decentralized finance. (ScienceDirect, Éd.) International Review of Financial Analysis, 92(103083), pp. 1-12.

Shah, K., Lathiya, D., Lukhi, N., Parmar, K., & Sanghvi, H. (2023, July 17). A systematic review of decentralized finance protocols. (ScienceDirect, Éd.) International Journal of Intelligent Networks, 4, pp. 171–181.

Trozze, A., Kleinberg, B., & Davies, T. (2024). Detecting DeFi securities violations from token smart contract code. Financial Innovation, 10(1), PP. 1-35.

Vakhmyanin, I., & Volkovich, Y. (2023). Price Arbitrage for DeFi Derivatives. In 2023 IEEE International Conference on Blockchain and Cryptocurrency, ICBC 2023.

Published

2024-08-03

How to Cite

Cedra, A. (2024). Mitigating risks in decentralized finance: A Systematic review of challenges and solutions. International Journal of Economic Perspectives, 18(1), 104–125. Retrieved from https://ijeponline.org/index.php/journal/article/view/549

Issue

Vol. 18 No. 1 (2024)

Section

Peer Review Articles
Copyright & Licensing

Copyright (c) 2024 Anissa Cedra

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Allows users to: distribute and copy the article; create extracts, abstracts, and other revised versions, adaptations or derivative works of or from an article (such as a translation); include in a collective work (such as an anthology); and text or data mine the article. These uses are permitted even for commercial purposes, provided the user: gives appropriate credit to the author(s) (with a link to the formal publication through the relevant URL ID); includes a link to the license; indicates if changes were made; and does not represent the author(s) as endorsing the adaptation of the article or modify the article in such a way as to damage the authors' honor or reputation. CC BY