Cryptocurrencies and Decentralized Finance (DeFi)
Igor Makarov, Antoinette Schoar
Abstract
The paper provides an overview of cryptocurrencies and decen tralized finance (DeFi). The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system offinancialintermediation.OuranalysishighlightsthatwhiletheDeFiarchitecture might have the potential to reduce transaction costs, similar to the traditionalfinancialsystem,thereareseverallayerswhererentscanaccumulatedue toendogenousconstraintstocompetition.Weshowthatthepermissionlessand pseudonymousdesignofDeFigenerateschallengesforenforcingtaxcomplianceandanti-moneylaunderinglawsandpreventingfinancialmalfeasance. WehighlightwaystoregulatetheDeFisystemwhichwouldpreserveamajority ofbenefitsoftheunderlyingblockchainarchitecturebutsupportaccountability andregulatorycompliance.