research-article

DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency

Authors:

William J. KnottenbeltAuthors Info & Claims

AFT '20: Proceedings of the 2nd ACM Conference on Advances in Financial Technologies

Pages 92 - 112

https://doi.org/10.1145/3419614.3423254

Published: 26 October 2020 Publication History

Abstract

We coin the term Protocols for Loanable Funds (PLFs) to refer to protocols which establish distributed ledger-based markets for loanable funds. PLFs are emerging as one of the main applications within Decentralized Finance (DeFi), and use smart contract code to facilitate the intermediation of loanable funds. In doing so, these protocols allow agents to borrow and save programmatically. Within these protocols, interest rate mechanisms seek to equilibrate the supply and demand for funds. In this paper, we review the methodologies used to set interest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We provide an empirical examination of how these interest rate rules have behaved since their inception in response to differing degrees of liquidity. We then investigate the market efficiency and inter-connectedness between multiple protocols, examining first whether Uncovered Interest Parity holds within a particular protocol and second whether the interest rates for a particular token market show dependence across protocols, developing a Vector Error Correction Model for the dynamics.

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https://doi.org/10.4018/JGIM.367810
Ali SZhang TYousaf I(2025)Interlinkage between lending and borrowing tokens and US equity sector: Implications for social financeResearch in International Business and Finance10.1016/j.ribaf.2024.10263073(102630)Online publication date: Jan-2025
https://doi.org/10.1016/j.ribaf.2024.102630
Dunbar KTreku DOwusu-Amoako J(2025)The decentralization enigma in DeFi: Impact of U.S. federal funds rate changesThe British Accounting Review10.1016/j.bar.2025.101613(101613)Online publication date: Feb-2025
https://doi.org/10.1016/j.bar.2025.101613
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DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency
1. Applied computing
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cover image ACM Conferences

AFT '20: Proceedings of the 2nd ACM Conference on Advances in Financial Technologies

October 2020

275 pages

ISBN:9781450381390

DOI:10.1145/3419614

Copyright © 2020 ACM.

Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. Copyrights for components of this work owned by others than the author(s) must be honored. Abstracting with credit is permitted. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. Request permissions from [email protected].

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Publication History

Published: 26 October 2020

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Tezos Foundation
Engineering and Physical Sciences Research Council
Brevan Howard Centre for Financial Analysis

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AFT '20

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ACM

AFT '20: 2nd ACM Conference on Advances in Financial Technologies

October 21 - 23, 2020

NY, New York, USA

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Cited By

Szrajber BAlon ILevy S(2025)Systematic Analysis of Decentralized FinanceJournal of Global Information Management10.4018/JGIM.36781033:1(1-29)Online publication date: 17-Jan-2025
https://doi.org/10.4018/JGIM.367810
Ali SZhang TYousaf I(2025)Interlinkage between lending and borrowing tokens and US equity sector: Implications for social financeResearch in International Business and Finance10.1016/j.ribaf.2024.10263073(102630)Online publication date: Jan-2025
https://doi.org/10.1016/j.ribaf.2024.102630
Dunbar KTreku DOwusu-Amoako J(2025)The decentralization enigma in DeFi: Impact of U.S. federal funds rate changesThe British Accounting Review10.1016/j.bar.2025.101613(101613)Online publication date: Feb-2025
https://doi.org/10.1016/j.bar.2025.101613
Fateh Singh SNekriach VMichalopoulos PVeneris AKlinck J(2025)Option Contracts in the DeFi Ecosystem: Opportunities, Solutions, and Technical ChallengesInternational Journal of Network Management10.1002/nem.7000535:2Online publication date: 16-Feb-2025
https://doi.org/10.1002/nem.70005
Koro E(2024)Integration of Artificial Intelligence in DeFiDecentralized Finance and Tokenization in FinTech10.4018/979-8-3693-3346-4.ch009(148-170)Online publication date: 21-Jun-2024
https://doi.org/10.4018/979-8-3693-3346-4.ch009
Alamsyah AKusuma GRamadhani D(2024)A Review on Decentralized Finance EcosystemsFuture Internet10.3390/fi1603007616:3(76)Online publication date: 26-Feb-2024
https://doi.org/10.3390/fi16030076
Frolov SIvasenko MDykha MShalyhina IHrabar VFenyves V(2024)Interaction between decentralized financial services and the traditional banking system: A comparative analysisBanks and Bank Systems10.21511/bbs.19(2).2024.0519:2(53-74)Online publication date: 22-Apr-2024
https://doi.org/10.21511/bbs.19(2).2024.05
Bertucci CBertucci LGontier Delaunay MGueant OLesbre M(2024)Agents' Behavior and Interest Rate Model Optimization in Defi LendingSSRN Electronic Journal10.2139/ssrn.4802776Online publication date: 2024
https://doi.org/10.2139/ssrn.4802776
Chen EMa MNie Z(2024)Perpetual Future Contracts in Centralized and Decentralized Exchanges: Mechanism and Traders' BehaviorSSRN Electronic Journal10.2139/ssrn.4696260Online publication date: 2024
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Aydaner GOkuyan H(2024)Decentralized finance: a comparative bibliometric analysis in the Scopus and WoS databasesFuture Business Journal10.1186/s43093-024-00380-y10:1Online publication date: 31-Jul-2024
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