Decentralized Finance

Financial markets are undergoing an unprecedented transformation. Technological advances have brought major improvements to the operations of financial services. While these advances promote improved accessibility and convenience, traditional finance shortcomings like lack of transparency and moral hazard continue to plague centralised platforms, imposing societal costs. The advent of distributed ledger technologies presents an opportunity to alleviate some of the issues raised by centralised financial platforms, regardless of their integration of financial technology enhancements. These technologies have the potential to further disrupt the financial service industry by facilitating the transition to a decentralised trading environment, also referred to as decentralised finance (DeFi). DeFi enables the provision of services such as exchanges, lending, derivatives trading, and insurance without the need for a centralised intermediary. This monograph provides an overview of the DeFi ecosystem, with a focus on exchanges, lending protocols, and the decentralised governance structure in place. The monograph also discusses the operational risks inherent in the design of smart contracts and the DeFi ecosystem, and it concludes with remarks and directions for future research.