Competitive dynamics between decentralized and centralized finance lending markets

【Author】 Son, Jaemin; Ryu, Doojin

【Source】INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS

【影响因子】8.235

【Abstract】We analyze the competitive dynamics between a decentralized financial system, called a protocol for loanable funds (PLF), and a centralized financial system. A PLF primarily differs from traditional banks in terms of its purpose and its decentralized ledger. While traditional banks pursue profit maximization, the PLF with a decentralized ledger system liquidates borrowing demand in line with the supply of deposits. We provide a theoretical framework that incorporates the differences among the lending markets to outline their competitive dynamics and suggest an optimal design for the PLF's consensus algorithm. The traditional bank incurs a cost to secure market power that depends on its degree of heterogeneity from the PLF. Our results suggest channels through which monetary policy influences the interest rates of PLFs.

【Keywords】Blockchain trilemma; Centralized finance; Decentralized finance; Financial stability; Protocol for loanable funds

【发表时间】2024 NOV

【收录时间】2024-11-18

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