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Vol.:(0123456789)
Digital Finance (2024) 6:55–95
https://doi.org/10.1007/s42521-023-00088-8
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ORIGINAL ARTICLE
The technology ofdecentralized finance (DeFi)
RaphaelAuer1· BernhardHaslhofer2· StefanKitzler3· PietroSaggese3·
FriedhelmVictor4
Received: 10 March 2023 / Accepted: 21 June 2023 / Published online: 1 August 2023
© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2023
Abstract
Decentralized Finance (DeFi) is a new financial paradigm that leverages distrib-
uted ledger technologies to offer services such as lending, investing, or exchang-
ing cryptoassets without relying on traditional centralized intermediaries. A range
of DeFi protocols implements these services as a suite of smart contracts, i.e., soft-
ware programs that encode the logic of conventional financial operations. Instead
of transacting with a counterparty, DeFi users interact with software programs that
pool the resources of other DeFi users. DeFi’s programmable and automated tech-
nology could foster efficiency and increase transparency. However, it exposes users
to idiosyncratic risks, such as smart contract vulnerabilities and complex protocol
interoperability. This paper provides a deep dive into the overall architecture, the
technical primitives, and the financial functionalities of DeFi protocols. We analyze
and explain the individual components and how they interact through the lens of a
DeFi stack reference (DSR) model featuring three layers: settlement, applications
and interfaces. We discuss the technical aspects of each layer of the DSR model.
Then, we describe the financial services for the most relevant DeFi categories, i.e.,
decentralized exchanges, lending protocols, derivatives protocols and aggregators.
The latter exploit the property that smart contracts can be “composed,” i.e., utilize
the functionalities of other protocols to provide novel financial services. We discuss
how composability allows complex financial products to be assembled, which could
have applications in the traditional financial industry. We discuss potential sources
of systemic risk and conclude by mapping out an agenda for research in this area.
Keywords Decentralized finance· DeFi· Blockchain· Ethereum· DLT·
Stablecoin· Cryptoasset
JEL Classification E42· E58· F31· G19· G23· L50· O33· G12
The views expressed in this document are those of the authors and not necessarily the views of
the BIS. We thank Matteo Aquilina, Rainer Böhme, Andrea Canidio, Emma Claggett, Christian
Diem, Nicola Dimitri, Alexander Eisl, Pirmin Fessler, Jon Frost, Arthur Gervais, Aljosha Judmayer,
Masarah Paquet-Clouston, Krzysztof Paruch, Burkhard Raunig, Andreas Schrimpf, Esther Segalla,
Nicholas Stifter, Martin Summer, Stefan Thurner, Marcus Wunsch, and Teng Andrea Xu.
Extended author information available on the last page of the article
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