BIS Working Papers

No 1066
The Technology of
Decentralized Finance
(DeFi)
by Raphael Auer, Bernhard Haslhofer, Stefan Kitzler,
Pietro Saggese and Friedhelm Victor

Monetary and Economic Department

January 2023

JEL classification: E42, E58, F31, G19, G23, L50, O33, G12.

Keywords: financial engineering, decentralized finance,

DeFi, blockchain, Ethereum, DLT, cryptocurrencies,
stablecoins, cryptoassets.
BIS Working Papers are written by members of the Monetary and Economic
Department of the Bank for International Settlements, and from time to time by other
economists, and are published by the Bank. The papers are on subjects of topical
interest and are technical in character. The views expressed in them are those of their
authors and not necessarily the views of the BIS.

This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2023. All rights reserved. Brief excerpts may be
reproduced or translated provided the source is stated.

ISSN 1020-0959 (print)

ISSN 1682-7678 (online)
 The Technology of Decentralized Finance (DeFi)

Raphael Auer∗ Bernhard Haslhofer† Stefan Kitzler‡ Pietro Saggese§

Friedhelm Victor¶

January 17, 2023

Abstract
Decentralized Finance (DeFi) is a new financial paradigm that leverages distributed ledger
technologies to offer services such as lending, investing, or exchanging cryptoassets without
relying on a traditional centralized intermediary. A range of DeFi protocols implements
these services as a suite of smart contracts, ie software programs that encode the logic of
conventional financial operations. Instead of transacting with a counterparty, DeFi users
thus interact with software programs that pool the resources of other DeFi users to maintain
control over their funds. This paper provides a deep dive into the overall architecture, the
technical primitives, and the financial functionalities of DeFi protocols. We analyse 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, ie decentralized exchanges, lending protocols,
derivatives protocols and aggregators. The latter exploit the property that smart contracts
can be “composed”, ie 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: Financial engineering, Decentralized Finance, DeFi, Blockchain, Ethereum,

DLT, Cryptocurrencies, Stablecoins, Cryptoassets
JEL classification: E42, E58, F31, G19, G23, L50, O33, G12

∗
Bank for International Settlements; email: [email protected]. The views expressed in this doc-
ument are those of the authors and not necessarily the views of the BIS. † Complexity Science Hub Vi-
enna; email: [email protected]. ‡,§ Complexity Science Hub Vienna and AIT — Austrian Institute
of Technology; email: [email protected] and [email protected]. ¶ Technische Universität Berlin; email:
[email protected]. 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.
1 Introduction
Decentralized Finance (DeFi) offers on-chain financial services such as borrowing, lending, or
investing without relying on a traditional centralized financial intermediary [121]. DeFi appli-
cations strive for disintermediation and censorship resistance, with partial success [32, 42, 133].
They are often realized as open-source software and enable governance models that let arbitrary
stakeholders participate in decision-making processes [66]. Technically, such services are imple-
mented as executable software programs called smart contracts whose execution is automated,
ensuring deterministic outcomes and re-usability. These programs are then deployed on smart
contract-enabling distributed ledger technologies (DLTs) such as Ethereum [124] or Tron. In-
terest in DeFi rose sharply in 2020 and, during its peak in 2021, reached a total value locked
(TVL) of more than 150 billion USD [40].1
It is still unclear if and to what extent DeFi will proliferate in the future [23]. Today even
most cryptocurrency trading happens off-chain on centralized crypto exchanges, which does not
constitute DeFi [13, 10]. Recent episodes of market turmoil have led to a discussion on whether
and how DeFi industry should be regulated [109, 8].
Nevertheless, we consider DeFi a relevant development because it harnesses innovative tech-
nology that might shape the future financial ecosystem. This innovation can be traced back
to the following three fundamental characteristics, which are of interest well beyond cryptocur-
rency markets. First is the algorithmic automation of financial activity, such as market-making,
supporting the pooling of assets of small and large-scale actors alike. In the best case, such algo-
rithmic services might reduce inefficiencies while being transparent to all parties, also allowing
users to retain full control over their funds [61].
Second is enabling a novel form of competitive financial engineering, reinforced by what
are known as “DeFi compositions” where financial service providers can combine the financial
functions of several DeFi protocols to offer novel, complex, and deeply nested financial products
without being dependent on any single intermediary [71]. This is possible because DeFi protocols
are, in essence, computer programs that can automatically call on other computer programs.
Third, and related to the previous aspects, DeFi could be a blueprint of how technology
can enable new forms of openness to the financial sector. One could envision making use of
the underlying technology in the current financial system to provide stability and scale for
programmable finance ecosystems [23].2
However, DeFi introduces enormous technological and economic complexity that makes the
interpretation, evaluation, and risk assessment of DeFi financial products increasingly difficult.
A systematic evaluation of these aspects is needed by financial institutions and regulators deal-
ing with DeFi (e.g., [57, 10]). Recent research has shown how DeFi is subject to risks common
to the broader financial system: lending protocols can become insufficiently collateralized or in-
solvent [59]. Furthermore, the promises of transparency and stability in DeFi are not necessarily
guaranteed, as is exemplified by investigations into the Tether stablecoin [26]. A stablecoin run
with consequent deleveraging spiral effects [25, 74] involved Terra’s algorithmic stablecoin pro-
tocol and its associated cryptoassets, LUNA and UST, leading to its rapid collapse. The UST
stablecoin was exploited in many DeFi protocols built on the Terra blockchain and through
bridges on different blockchains. Its crash affected large parts of the DeFi ecosystem [100].
Furthermore, miners and validators can choose which transactions they add to the ledger and
1
TVL has emerged as a popular indicator to quantify and measure the performance of a DeFi protocol. It is
generally defined as the total value of cryptoassets locked in a protocol by users. Technically, TVL for a given
DeFi protocol is computed by retrieving and pricing token balances from associated smart contacts. The decision
of which assets of a given DeFi protocol to include in calculating the TVL value does not follow a standardized
procedure. As a result, it can lead to different interpretations and even manipulation (cf. [90, 89]).
2
One example in this direction is Project Mariana of the BIS Innovation Hub, the Eurosystem’s Banque de
France, the Monetary Authority of Singapore, and the Swiss National Bank, which examines the role of automated
market-makers in foreign exchange markets [24].

2
in which order, giving rise to the prevalence of front-running, sandwich trades, and related is-
sues [14]. The rise of DeFi has been accompanied by many incidents with an accumulated total
loss exceeding 3 billion USD [133]. These incidents highlight the risks of technical vulnerabili-
ties [34] and their amplification caused by the intertwined nature of DeFi protocols [71].
A deep understanding of DeFi is still lacking in many circles, which calls for a specific
framework for an improved working knowledge of the technology. Therefore, in this paper, we
introduce the technical fundamentals and financial functions of DeFi to a broad audience having
diverse backgrounds. In addition, we include the most recent findings and advancements that
contribute to understanding their functioning, design, and how they can interoperate.
Building on previous work [34, 121, 107, 133], we start by introducing the DeFi Stack Refer-
ence (DSR) model in Section 2 as a conceptualization of the technical primitives and financial
functions that DeFi protocols build upon. Then, in Section 3, we describe in more detail the
essential technical primitives, such as DLTs and smart contracts. Next, in Section 4, we outline
the spectrum of cryptoassets used to represent and transfer value in the DeFi ecosystem. In
Section 5, we describe the design and financial functions of the most prominent DeFi protocol
families and abstract them into a generalized DeFi framework. After explaining the core com-
ponents and functions of individual DeFi protocols, we describe how they can be combined into
DeFi compositions (Section 6). Finally, in Section 7, we outline an interdisciplinary agenda that
follows the DSR model and indicates future research directions.

2 DeFi Definition and Stack Reference (DSR) Model

We start by providing a high-level definition of DeFi before we introduce the DSR Model.

Definition 1 Decentralized Finance (DeFi) is a competitive, contestable, compos-

able and non-custodial financial ecosystem built on technology that does not require
a central organization to operate and that has no safety net. It consists of financial
protocols — implemented as “smart contracts” — running on a network of computers to auto-
matically manage financial transactions. Implemented on top of DLT, it does not require banks
or other traditional centralized intermediaries. The underlying ecosystem is competitive as novel
intermediaries — miners or validators — compete to process and settle transactions. Users can
choose from different financial protocols; these are contestable as anyone can become an inter-
mediary or deploy a protocol or even start a new ledger; composable as complex services can be
assembled from basic protocols; and non-custodial as users can keep direct custody of their assets
when accessing financial services. DeFi does not come with any safety net as it lacks protection
from criminal conduct or investor fraud and erroneous transactions cannot be undone.

We note that DeFi is larger than an individual cryptocurrency such as Ethereum. Instead, the
overall DeFi ecosystem appears as a composite and somewhat fragmented collection of individual
subsystems, each built on top of one DLT with specific technical features that delineate and
delimit the design choices of the financial protocols that can be implemented on it. This could
change in the future, as several projects currently try to implement communication channels
across DLTs. At the time of writing, Ethereum represents the most relevant DeFi subecosystem,
both in terms of value locked and relevance of financial protocols built on top of it.
We also note that only “on-chain”3 financial activity can be categorized as DeFi. Cryptoasset
exchanges such as the recently collapsed FTX,4 are primarily centralized platforms that provide
interfaces to buy and sell cryptoassets using conventional IT systems. They manage and match
orders in a private limit order book, with no direct effect on the DLT. Similarly, cryptoasset
3
We use the term “on-chain” loosely to denote transactions executed and recorded on a distributed ledger.
4
See https://www.ft.com/content/c236d6f9-da5a-4da7-8dc8-5cd450dfe39d on the FTX failure.

3
loan companies like Celsius5 act as a centralized intermediary. Customers that interact with
such platforms or with conventional institutions give up custody of their assets.
Instead, DeFi aims at disintermediation: users interact with smart contracts, rather than
with an institution, and no user identification is required. As an example, lending in DeFi is
facilitated by smart contracts that hold the cryptoassets deposited by the lenders, that in turn
can be borrowed by other DeFi users who are also interacting with a smart contract.
The exchange of cryptoassets in DeFi is executed in a similar fashion: while some users
can provide liquidity by depositing funds in smart contracts, others can exchange them directly
against the contract, and prices are updated automatically. These financial services are not
controlled and supervised by traditional financial institutions or market authorities, ie they do
not come with safeguards against criminal activity or investor fraud.
DeFi protocols implement such financial services as a suite of smart contracts. As any
other modern software program, they also follow the “abstraction principle”, which encapsulates
well-defined functions in multiple abstraction layers, each using functionality provided by the
one immediately beneath and offers functionality to the one above. In earlier research, Schär
introduced a layered framework for DeFi [107]. Building on this and other related DeFi stack
approaches [34, 121], considering new developments in the literature, as well as expanding the
concept of composability in DeFi, we introduce a DeFi Stack Reference (DSR) Model to illustrate
the technical primitives, financial functions, and compositions of DeFi protocols conceptually.
As shown in Figure 1, it defines three layers, further subdivided into five sub-layers.

Settlement Layer This layer is responsible for completing financial transactions and discharg-
ing the obligations of all involved parties [22]. This involves resolution of potential conflicts and
finding consensus on the current state of a system. In DeFi, this functionality is typically pro-
vided by a DLT, which implements consensus protocols and provides means for replicating the
state globally across all distributed computer nodes. DLTs such as Ethereum or Solana also
offer an execution environment for smart contracts, which are the core components of all DeFi
protocols. DLT platforms are equipped with a native token (e.g., ETH) that represents and
transfers value in transactions or in smart contract execution. Native tokens lie at the intersec-
tion of the settlement and the DLT application layer. They are cryptoassets, but are embedded
in the settlement layer and are not deployed as smart contracts, unlike other non-native tokens.

DLT Application Layer It comprises applications implemented through smart contracts.

• Cryptoassets are DLT applications that facilitate the transfer of value across the DeFi
ecosystem. They can be defined arbitrarily by anyone, simply by implementing specific
“token contracts” that typically carry a name, e.g. Tether, and a symbol, e.g. USDT. A
token contract can either maintain a registry of account addresses and balances (fungible
token) or record token ownership (non-fungible token).
• A DeFi Protocol is a DLT application implemented by a set of smart contracts, utiliz-
ing cryptoassets and providing some financial service functionality. Based on the offered
functionalities, we can roughly distinguish among lending protocols, derivatives protocols,
and decentralized exchanges (DEXs). Functionality is realized through financial functions
such as the pooling of liquidity provided by multiple users, the supply of collateral, or the
swap of cryptoassets. Certain functions are specific to a particular type of protocol, while
others are used in several protocols and across different categories.
• DeFi Compositions enable a specific type of DeFi protocol, also implemented by a set
of smart contracts, that provide novel financial services by using services of other DeFi
protocols. DEX Aggregators redirect users programmatically towards the DEX offering the
best price for the swap of a cryptoasset pair, while Yield Aggregators implement strategies
to invest user funds in other DeFi protocols and maximize their returns.
5
Known to the public after filing for bankruptcy in July 2022 https://reut.rs/3BAVLUj.

4
 Stack Layers Stack Sub-layers Associated Entities

Interface Application Front-end Interfaces DeFi Users

Layer

DeFi Compositions
DEX Yield Governance
Aggregators Aggregators Users

DeFi Protocols Keepers,

Arbitrageurs
DLT Decentralized Derivatives Lending
Application Exchanges Protocols Protocols
Layer Oracle
Operators
Cryptoassets
Non-fungible Tokens Fungible Tokens Real-world
Assets & Reserves

Distributed Ledger Technology

Settlement Consensus + State Replication + Program Execution Validators
Layer

Financial services Technical primitives

Figure 1: DeFi Stack Reference (DSR) Model. At the foundation, the settlement layer, DLTs
allow to reach an agreement on the global state of the system, replicate it across network nodes, and
execute computer programs that facilitate financial transactions in return for some native token. The
DLT application layer comprises arbitrary cryptoassets, DeFi protocols and DeFi compositions, offering
some specific financial service, all implemented as part of smart contracts. Protocols in different categories
can implement similar financial functionalities. Finally, the interface layer provides graphical front-end
interfaces to DeFi users. Each layer is associated to off-chain entities: validators ensure that consensus
is reached, fiat currencies are the reserves for many cryptoassets, oracles import on-chain information
about real-world assets, and keepers and arbitrageurs enforce incentive mechanisms. Protocol governance
is composed of DeFi users with decision-making powers. End-users interact through interfaces with DeFi
protocols.

Interface Layer DLT applications are implemented as smart contracts and provide program-
matic interfaces to developers but do not offer any interactive graphical tool to the end-users.
Instead, DeFi applications provide front-end interfaces that facilitate the interaction with the
smart contract logic. This is typically achieved via non-blockchain applications, such as Web or
mobile device applications. This layer acts mainly as a framework to provide input parameters
to the DLT application layer. For the purpose of this paper, this layer is less relevant than the
previous ones and thus we will not cover it in detail in the subsequent sections.
Each of these DeFi stack layers is associated with real-world entities in a broader ecosystem
(see Figure 1, right-hand side column). On the lowest layer, validators are economically incen-
tivized to process transactions and execute programs. USD, EUR, and other fiat currencies are
used as a reserve by cryptoassets known as stablecoins. Financial functions like asset swapping
often rely on external information: oracle operators maintain smart contracts that allow to ac-
cess, within a DLT, off-chain data coming from the external world such as real-world asset prices
or related exchange rates. Finally, end-users can participate as a stakeholder in the governance
of a protocol or interact with a DeFi application via user interfaces.

5
 External Transactions Internal Transactions

...
EOA

Smart Contract
...
EOA

Figure 2: Account and Transaction Types. An Ethereum transaction always begins with an external
transaction that can only be initiated by a user account, also known as an Externally Owned Account
(EOA). It can be directed to another EOA or an account controlled by a smart contract. A smart contract
can send messages (also denoted as internal transactions) to other accounts, both to EOAs and CAs.
Therefore, a smart contract can produce call cascades, ie, trigger multiple contracts, which can call other
contracts within the same transaction.

3 Settlement Layer: the Technical Primitives

The entire DeFi ecosystem is built on several different DLTs. However, Ethereum represents
the most relevant one in terms of invested funds and projects developed on it. Thus, in the
following we will refer to it, unless specified differently.

Distributed Ledger Technology DeFi protocols are software programs running on DeFi-
enabling distributed ledger technology, such as the open, permissionless Ethereum blockchain.
DLTs provide transaction execution capabilities and implement consensus protocols to agree,
represent and replicate system states globally without relying on a single intermediary node [43].
A key feature determining whether a DLT is suitable for DeFi is the availability of an execu-
tion environment for deploying and running smart contracts, ie software programs implementing
financial functions. While the Bitcoin blockchain already provides basic mechanisms for execut-
ing custom code, its capabilities are limited [11]. Therefore, DeFi protocols typically operate
on smart contract-enabled blockchains like Ethereum, and are executed by a virtual machine,
like the Ethereum Virtual Machine (EVM). Ethereum is still the most important blockchain for
DeFi but suffers from heavy network congestion and high transaction fees [42] caused by the
increasing volume of DeFi transactions. Consequently, we can observe that DeFi protocols are
now deployed also on other EVM-compatible (e.g., Binance Smart Chain, Avalanche, Polygon,
Arbitrum) and non-EVM-compatible (e.g., Tron, Solana, Terra) blockchains.6 If DeFi protocols
are deployed across multiple chains, one also speaks of multichain DeFi protocols.

State Representation: Accounts A key difference to Bitcoin is that Ethereum is an

account-based distributed ledger. An Ethereum address identifies an account whose state is
updated via state transitions through transactions. The account state stores information about
the balance and the number of transactions executed. The account model thus maintains a
database of account states. As Figure 2 shows, two different types of accounts exist: Externally
Owned Accounts (EOAs), ie user accounts, and Code Accounts (CAs), commonly known as
6
See https://defillama.com/chains/Non-EVM

6
 New Block State N

Tx 1 EOA Balances Contract State 0x123

Payment ETH DAI

0xF0a 10 # 0xF0a 250
Tx 0x13b
Sender 0xF0a ETH

Receiver 0xc4f 0xc4f 5

Value ETH X 3
Data -
change state to State N + 1

EOA Balances Contract State 0x123

0xF0a 0xc4f
ETH DAI

Tx 2 0xF0a 7 3 # 0xF0a 250

ETH
Contract Invocation
0xc4f 8
Tx 0xb3D
Sender 0xF0a
Receiver 0x123
change state to State N + 2
Value -
EOA Balances Contract State 0x123
Data Transfer
DAI X 50 ETH DAI

0xF0a 7 # 0xF0a 200 50

0xF0a 0x123
ETH DAI

Tx ... 0xc4f 8 # 0xc4f 50

Figure 3: Transactions in new validated blocks and state changes. Transactions indicate the
sender, the receiver, the Ether (ETH) sent, and the data payload. A Payment updates the state, e.g. from
N to N + 1. Ether is transferred from the sender, Alice, to the receiver, Bob. A Contract invocation
changes the state to N + 2. To transfer tokens to Bob, Alice must trigger the contract that controls them:
the EVM interprets the data payload and the contract is executed. The token holders’ balances, stored
in a map of hashed addresses, are updated. Note that we do not account for the transaction fees in this
illustrative example.

smart contracts. EOAs can create CAs via specific transactions, also called contract creations.
A cryptographic private key controls the former; consequently, transactions can be sent by the
account owners (external transactions). The latter, instead, are associated with and controlled
by their own code (which an EOA does not have). They do not have a private key and thus
cannot broadcast transactions directly: a CA is always initially executed by an EOA. However,
once executed, a CA can itself call other contracts. This can result in a cascade of contract calls,
all within one individual transaction, also called traces or internal transactions [35].

State Transition: Transactions As in Bitcoin, transactions are a core element of the

Ethereum blockchain, as they trigger and broadcast the intended state changes to the network.
Figure 3 describes how transactions update and modify the global state of a DLT like Ethereum.
By default, transactions contain, among other fields, information on the transaction Recipient,
the Value, and the Data broadcast. The Recipient field is an address that indicates the receiver
of the transaction.7 Transactions with an EOA as recipient typically only contain Value, as the
EOA addresses cannot interpret the managed code, and serve as payment (in Ether) among two
parties. As a result, when the transaction is stored on the blockchain, the EOA account balances
are updated, reflecting such state transition. Transactions executed against a smart contract
contain instead a data payload in the Data field that triggers the CA itself. For instance, in the
7
We note that funds lost in unintended transactions, e.g. sent to wrong addresses, cannot be recovered.

7
contract invocation represented on the right side of Figure 3, the sender intends to transfer 50
DAI tokens to another EOA. The external transaction is not directed to the EOA itself but to
the token smart contract, and the token transfer is executed in subsequent internal transactions.
The contract internally maps the EOA addresses to its internal storage, thus recording the token
balance for each owner. The state change of the contract is reflected in the new internal balance
of token ownership. Thus, the token balance of Ethereum accounts is handled at the smart con-
tract level, whereas the Ether balance of Ethereum accounts is handled at the protocol level. In
other words, sending Ether is an intrinsic activity of the Ethereum DLT, while sending or even
owning tokens is not, and token transfers executed in internal transactions are not explicitly
visible in the blockchain.

Consensus Protocols In an open, permission-less setting that allows anyone to participate,

providing a robust, global state of the ledger is non-trivial. Consensus protocols solve the
problem of synchronizing the account states in distributed systems such as DLTs, so that all
nodes reach and maintain an agreement on it, even in the presence of malicious users [125].
In the DLT context, consensus mechanisms guarantee that new transactions, representing state
changes, are appended in a unique and agreed order.
The typical assumption underlying a consensus protocol is that, in a distributed system of n
independent nodes, the consensus can tolerate the failure (or malicious behavior) of a fraction
of nodes f < n/k, where k is a parameter that varies for each consensus protocol, and the other
n − f nodes are not subject to failure [33]. Another approach is taken in [15], who model the
underlying economic incentives that validators need to sustain an honest exchange.
Whilst many different consensus algorithms have been devised [132], the Proof-of-Work
(PoW) and the Proof-of-Stake (PoS) are by far the most common ones. Bitcoin, for instance,
relies on PoW to achieve consensus. Without PoW, malicious users could easily create pseudony-
mous accounts to undermine the authority or power of a decentralized network or to gain control
over a network. This is also known as a Sybill attack. PoW prevents such attacks and provides
robustness by demanding nodes to conduct computationally intensive tasks to participate in the
process of adding new transactions to the blockchain (and earn rewards when elected to do so).
However, this approach has downsides, such as the enormous associated energy waste [91, 39]
and question marks regarding the security of payments once a cryptocurrency’s block subsidy is
phased out [12]. PoS is a promising alternative, where Sybil attacks are prevented by, roughly
speaking, attributing to each participant in the consensus protocol a weight that is propor-
tional to her stake as recorded in the ledger itself. At the time of writing, Ethereum already
transitioned to PoS [46].

4 Cryptoassets in DeFi
Cryptoassets are used to represent and transfer value in a DLT and are, therefore, a fundamental
element in the DeFi ecosystem. Current definitions for the term “cryptoasset” are non-uniform
because they depend on the context (e.g., technical vs. legal) and on legal frameworks [79]. In
the context of this paper, we denote as cryptoasset all digital assets that utilize cryptographic
primitives and distributed ledger technology and represent some economic resource or value to
someone. In a decentralized ecosystem such as DeFi they can be, amongst others, used as a
means of exchange, for investment purposes, or to access a good or service.8
Figure 4 illustrates a (simplified) taxonomy that introduces the spectrum of cryptoassets.9 It
can be roughly divided based on the conceptual design of their underlying settlement layer: cryp-
toassets can either follow Bitcoin’s Unspent Transaction Output (UTXO) model or Ethereum’s
8
European Banking Authority Report with advice for the European Commission on Cryptoassets [47]
9
More detailed categorizations can be found in [79] and [84], that focus on the legal aspects, in [92] that
investigates the technical aspect, and [7] that provides a more comprehensive approach including multiple aspects.

8
 UTXO-based Model Account-based Model
Cryptoassets

Native Token Non-native Token

XMR BTC ETH Fungible Non-fungible

ZEC IOTA UST/LUNA Cryptokitties
DASH LTC EOS CFG

Stablecoins Utility Governance Equity

SNX COMP wETH, wBTC
MKR ETH/USDC LP
cDAI
Crypto Fiat Commodity
backed backed backed
Privacy- Transparent DAI USDT PAXG
focused

Virtual Assets
Financial instruments Digital art, collectibles

Physical Assets
Cash reserves Commodities, goods Physical art

Cryptoassets Tokenized assets (also cryptoassets) Relation with off-chain asset

Figure 4: Cryptoasset Taxonomy. DLTs either follow the Bitcoin-like UTXO or the Ethereum-like
account model. Both support native tokens (e.g., BTC and ETH). Native tokens can further be divided
into privacy-focused (e.g., XMR) or transparent ones (e.g., BTC). Account-model ledgers support the
implementation of custom non-native tokens using smart contracts. These tokens can be fungible (ERC-
20) or non-fungible (ERC-721). Stablecoins are fungible tokens backed by other crypto- or non-crypto
assets, like fiat currencies. UTXO-based DLTs are less relevant for DeFi; thus the area is shaded in gray.

account model. Both designs include native tokens, like BTC on the Bitcoin or ETH on the
Ethereum ledger. Native UTXO-based tokens can be further separated into privacy-focused,
such as Monero (XMR) or Zcash (ZEC), and transparent, such as Bitcoin (BTC) and other
alt-coins following its design. Account-model ledgers enable the deployment of arbitrary smart
contracts, thus they also allow issuing non-native tokens (or simply tokens). Technically, UTXO-
model ledgers can create tokens too (e.g., colored coins in Bitcoin [102]). However, the program-
ming capabilities of UTXO-based DLTs are limited and this restricts the relevant use cases of
such tokens. Thus, in the following, we focus on those deployed on Ethereum-like DLTs.
Non-native tokens are used for many purposes, from the definition of custom currencies,
over the representation of ownership or membership claims, to representing access credentials
for software games. Since the spectrum of token use can hardly be limited, categorizing based on
utility is difficult. However, it is possible to clearly distinguish tokens based on their technical
design as they follow a specific standard, which defines a predefined minimum set of functions to
be implemented by the smart contract controlling a token.10 The two primary token standards
are ERC-20 and ERC-721, which respectively define a common interface to create fungible tokens
and non-fungible tokens (NFTs).
Non-fungible tokens (NFTs) are typically used to represent and uniquely identify some spe-
cific virtual asset, such as digital art or a collectible [88]. More recently, NFTs are also issued for
10
All non-native token accounting activity is handled at the smart contract level; on the other side, balances
and transfers of native tokens are handled at the settlement level.

9
guaranteeing ownership of physical items such as sports collectibles, antiques, or even consumer
goods. Most DeFi applications do not yet rely on NFTs; however, recent developments indicate
that NFTs could, for instance, be used for loan collateralization or controlling fractional owner-
ship.11 Protocols like Centrifuge with its token CFG promise to bridge even real-world physical
assets to DeFi, by representing them on the blockchain (on-chain) as NFTs.12
Fungible tokens are intrinsically indistinguishable. As mentioned above, they can be utilized
for many purposes. In the context of DeFi, an example of a utility token is SNX, which is used
as collateral in the Synthetix protocol and enables access to specific smart contract functions.
ETH/USDC LP is an example of an equity token, representing claims on shares of underlying
assets, in this specific case being a claim on the amount of ETH and USDC deposited as liquidity
provision (LP) in the Uniswap DEX.13 It is used in the Uniswap protocol as a deposit certificate
for the ETH and USDC trading pair. Another important use case for fungible tokens in DeFi
is that of governance tokens, which allow users to become stakeholders with voting rights and
decision-making power in the governance structure of a DeFi protocol [113]. MKR and COMP
are governance token examples of the protocols MakerDAO and Compound. Typically, gover-
nance tokens are distributed to protocol users and grant rights in fractional shares proportional
to the held amounts. However, recent research has shown that DeFi governance is often de-facto
centralized and usually composed of protocol insiders and developers [17, 66].
Another relevant type of cryptoasset, defined by its mechanism design rather than by the
technical aspects, is that of stablecoins. Their goal is to stabilize the price and volatility of a
token [87, 73] by pegging their value to some external reference asset. Stablecoins can be imple-
mented as ERC-20 tokens, e.g., DAI, USD Coin (USDC), Tether (USDT), or as a native asset like
UST in the Terra chain. The first and most important design choice of a stablecoin is the price
target or peg: it can be the USD price (DAI, USDT, USDC, UST) or commodities such as metals
(PAX Gold, or PAXG). The second choice regards the stabilization mechanism: in many cases,
stabilization is reached using the targeted asset or other liquid assets as collateral. USDC, for
instance, is backed almost entirely by cash, bank deposits, and Treasury bills. Tether (USDT),
on the other hand, is also backed with commercial paper and corporate bonds [65]. USDC and
USDT are centralized stablecoins: their issuance and redemption on-chain corresponds to fiat
transactions, executed off-chain, between the token governance and the investors.14 Thus, their
issuance is not automated and relies on commercial banks. Decentralized stablecoins like DAI
are instead backed with other cryptoassets (ETH, USDC, wBTC) and are fully automated and
non-custodial. Finally, some stablecoins rely on algorithmic-based approaches, whereby supply
is adjusted programmatically as a response to specific market conditions (e.g., Ampleforth), or
dual coin systems reach price stabilization as in the case of Terra tokens UST and LUNA. In
this mechanism, the stablecoin price (UST) is related by design to that of another token that
absorbs all volatility, and arbitrage mechanisms incentivize users to hold the volatile one [104].
The collapse of Terra, however, showed that stability pledges of algorithmic stablecoins are not
guaranteed and that they are susceptible to “stablecoin runs” [74].
In general, asset tokenization [106] is an essential feature in DeFi. By implementing a
dedicated token contract, one can represent any other on- or off-chain asset on a given DLT
platform. On Ethereum, for example, one can issue wrapped tokens, ie, ERC-20 compatible
versions of other cryptoassets. The wrapped BTC (wBTC) token is a prominent example and
allows users to use Bitcoin in the Ethereum DLT [27]. It is 1:1 backed with Bitcoin.15 Since
wrapped tokens often derive their value from some other (underlying) asset, one could argue
that existing assets that have been tokenized are generally a form of derivative [118].
11
See respectively https://bit.ly/3V1qCQQ and https://fractional.art/
12
https://centrifuge.io/
13
This token is issued upon interaction with the V2 version. At the time of writing, Uniswap also implemented
the V3 version, in which the claimant receives an NFT representing fractional ownership of the protocol liquidity.
14
See https://tether.to/en/how-it-works/
15
https://wbtc.network/

10
5 DeFi Protocols
After introducing cryptoassets as a core stack layer component in the DeFi ecosystem, we now
focus on the DeFi protocols, which provide higher-level financial services built on top of them,
such as borrowing, lending, or trading. Since the term is not yet clearly defined, as a starting
point, we define it for the purpose of this paper as follows:

Definition 2 A DeFi protocol provides one or more financial services to economic agents.
Financial services are implemented as program functions by one or more smart contracts.

Typically, a DeFi protocol and its underlying smart contracts are developed by a team of
developers as part of a specific project. While it is not straightforward to delineate precise
boundaries between protocols, for this paper, we identify the following main categories that
describe well most of the existing relevant DeFi protocols:

• Decentralized exchanges (DEXs) facilitate the exchange of cryptoassets.

• Lending protocols allow users to lend and borrow cryptoassets.

• Derivatives protocols are trading platforms where investors can issue and trade syn-
thetic positions that track the value of underlying crypto- or real-world assets.

Aggregation services like yield aggregators, which implement automated portfolio optimiza-
tion strategies and act as decentralized investment funds, are DeFi applications that provide
novel financial services by exploiting smart contracts composability. We thus discuss them in
Section 6.
Next, we describe, for each category, the main design mechanisms, the most important fi-
nancial services they offer, and the economic agents involved. We illustrate the functionality
of one representative DeFi protocol in each category and the main interactions with the eco-
nomic agents involved.16 We also compare these services to those offered by traditional finance
institutions. In this section, we focus on protocols deployed on Ethereum.

5.1 Decentralized Exchanges

Decentralized exchanges (DEXs) are DeFi protocols that facilitate the programmatic exchange
of cryptoassets. Their design can follow two main models: order book DEXs such as 0x [120] and
EtherDelta [45], which exploit the same model deployed in centralized trading platforms, and
DEXs with Automated Market Makers (AMMs) [128]. Most of the current research focuses on
the latter, aiming at better investigating their innovative design, and for this reason we focus our
attention on them. Different from traditional (and decentralized) order book-based exchanges,
in which price discovery depends on the matching mechanism of the buy and sell orders placed
by the traders, the AMM-based DEXs [20, 80, 82] exploit a peer-to-pool mechanism: for each
supported trading pair, a protocol-specific smart contract pools the cryptoasset reserves supplied
by many individual liquidity providers, acting de facto as an Automated Market Maker (AMM),
and incoming trades are executed against these pools.

Financial Services Figure 5 describes the services offered by DEXs and the economic agents
they interact with, using the protocol Uniswap V2 [3] as a reference. The core financial service
of DEXs is to facilitate the swap of tokens. A swap is a simple token exchange that a Trader
executes against a liquidity pool smart contract that holds reserves x and y of a token pair
(e.g., Tokenx and Tokeny ). For most AMMs, the swap pricing mechanism depends on invariant
16
The interactions illustrated in Figures 5 to 7 and 10 are constructed after conducting manual transactions
with the mentioned protocols, to fact-check and verify the correspondence with the reported documentation.

11
 Token x, Token y
Deposit
LP Token

Token x + Fee
Swap Pool (x,y)
Token y

Token y + Fee
Pool (x,y)
Token x
Token x + Fee
Arbitrage Pool (x,z)
Token z
Token z + Fee
Pool (z,y)
Token y

Distribute
Genesis govToken govToken
Allocation
govToken

LP Token
Withdraw
Token x, Token y, Fees

Set Parameters

Liquidity Provider DEX Governance User Trader Arbitrageur

Figure 5: AMM-based decentralized exchange (DEX). Traders are DeFi users who exchange (swap)
tokens, while Liquidity providers (LPs) deposit and withdraw liquidity in or from pools specific to each
trading pair. Arbitrageurs rebalance pool compositions when imbalances emerge. Users holding governance
tokens have voting rights and decision-making power and receive fees from users swapping tokens.

properties such as the conservation function that binds the pooled reserves of the two assets [5].
In the simplest case of a constant product function (CPF), the reserves are constrained by the
equation f (x, y) = x · y = k. UniSwap’s V1 and V2 versions implement this bonding curve.17
The spot exchange rate is the token reserve ratio. When a swap is executed, a trader
deposits an amount ∆x to the trading pair liquidity pool, and withdraws ∆y such that the
condition (x + ∆x) · (y − ∆y) = k is met [6]. Thus, large enough swaps can cause slippage,
ie, a difference between the spot and the realized price. Incentive mechanisms ensure price
convergence: Arbitrageurs rebalance pools for profit by conducting trades opposite to the price
slippage. Figure 5 illustrates the execution of a cyclic arbitrage strategy [119] across pools of
the same DEX. An alternative strategy is to conduct arbitrage on the same trading pair across
different DEXs [37].
In order to facilitate token swaps, liquidity pooling plays an essential role. DEXs exploit
smart contract-based financial functions that enable the deposit and withdrawal of token pairs
in or from the liquidity pool smart contracts. Any owner of a pair of tokens can become a
Liquidity provider (LP) by locking them in a liquidity pool [30]. In turn, LP tokens are minted
and supplied to the LP, proportionally to the amount of cryptoassets provided. Thus, LP tokens
represent pool shares and grant a claim to withdraw a fraction of the underlying funds when they
are burnt. In this sense, they are an example of asset tokenization, as they represent fractional
ownership of the underlying pool. Deposits typically respect the ratio established by the market
17
See [2, 3]. The latest version, V3, is based on a similar mechanism but introduces a more complex function [4].
Other common types of conservative functions are the constant sum [75] and the geometric mean [48, 49].

12
price18 to prevent the rise of arbitrage opportunities: a pure liquidity provision action does not
modify the implied exchange rate but rather affects the parameter k [30].
Incentive mechanisms foster liquidity provision. As LPs take on price risk, they are rewarded
with fees: for each swap, a fee is charged to the trader, and it is further divided between LP
shareholders.19 Part of the fees can be retained in the protocol20 and managed by the gover-
nance, ie, users who hold UNI, the protocol’s governance token. Governance tokens’ ownership
grants voting rights: owners can vote on design choices and propose strategic decisions such
as modifying protocol parameters (slippage control, fees) or deciding how to use the protocol
treasury. The UNI governance tokens were minted at the “Genesis”21 and distributed, according
to a teams’ decision, for a limited time to the team itself and to all protocol users as a reward
for participation. The practice of including governance tokens as a further incentive for protocol
users, and especially for LPs, is called liquidity mining [50]. For the period where liquidity
mining was active, governance tokens would appear in all user interactions with the protocol in
Figure 5; we thus show their distribution as a separate interaction to increase readability and
to underline that liquidity mining was active in Uniswap only for a short time window. Other
DEXs, such as Sushiswap and Curve, exploit more systematically liquidity mining programs.

Other Examples Other DEXs play a relevant role in DeFi and thus deserve special con-
sideration. SushiSwap [114], for instance, is a popular protocol created by forking UniSwap;
their mechanism design is similar. Curve [96] focuses on pools of cryptoassets with the same
underlying asset (e.g., USD-pegged stablecoins or Bitcoin-based cryptoassets) and implements
a constant function that allows for concentration liquidity in smaller price ranges. Balancer [86]
and Bancor [63] are two other relevant AMMs in terms of TVL. The first allows constructing
pools of multiple cryptoassets, while the latter supports single-asset liquidity provision.

5.2 Lending Protocols

Protocols for loanable funds (PLFs) [19], also referred to as lending protocols, automate the
borrowing and lending of cryptoassets. In doing so, they facilitate the efficient allocation of
capital within the DeFi ecosystem [9]. PLFs operate in a peer-to-pool fashion: borrowers interact
with smart contracts that pool the liquidity, ie, resources supplied by cryptoasset lenders. An
essential difference to loans issued by traditional financial institutions is that interest rates are
set automatically [129], mostly depending on market conditions such as the demand for loans
or the pool size, as well as on parameters decided at the governance level. Interest rates can be
influenced by systematic and protocol specific risk factors [64].

Financial Services Figure 6 shows how the economic agents interact with financial services
offered by lending protocols such as Compound [81]. The core service is token lending and
borrowing. Lenders deposit funds, and in return, they receive tokenized assets that allow them to
redeem deposits later in time, plus an additional interest rate. For example, the PLF Compound
generates wrapped tokens (cTokens) whose exchange rate against the underlying asset constantly
grows in time [103]. Thus, when funds are redeemed, their value has increased. On the contrary,
Borrowers pay interest on their open positions before closing them. Compound interest rates
follow a threshold-based model, ie they rise sharply after a specific borrowing utilization ratio
against the deposited funds, while other PLFs follow linear and non-linear models [60].
The collateralization of debt positions is a core financial function PLF contracts build upon.
Typically, borrowing is allowed only after collateral provision as a protection against the coun-
18
However, some AMM-based DEXs like Bancor support single-sided liquidity provision; Balancer allows to
decompose large LP actions into swaps and balanced LP actions [128].
19
See https://docs.uniswap.org/contracts/v2/concepts/advanced-topics/fees
20
At the time of writing, Uniswap doe not retain fees, unlike other DEXs such as Sushiswap [55].
21
See https://uniswap.org/blog/uni

13
 Token i
Lend
cToken i

Token k
Collateralize (Lend)
cToken k

Token i
Borrow
& Token i + interest
Repay
govToken
Token i
Liquidate
cToken k + Fee
Fee

cToken i
Redeem
Token i + interest, govToken

Set Parameters

Lender PLF Governance User Borrower Keeper

Figure 6: Lending protocol. Borrowers take out loans on funds supplied by Lenders, and their default
risk is hedged by overcollateralizing their positions. Keepers close insufficiently collateralized positions for
a fee. Governance members earn fees from protocol usage.

terparty risk of default.22 PLFs often require such positions to be overcollateralized due to
cryptoassets volatility and to counterparty anonymity [9]. In Compound, collateral is provided
by interacting with the same contract functions that serve to supply liquidity;23 thus, borrowers
earn interest on collateral. DeFi users can then borrow other cryptoassets. The interests paid
on borrows create the reserves to pay the lenders’ interests.
Price fluctuations can lead to insufficiently collateralized positions: if the borrower does not
provide additional capital, the loan may be liquidated [94]. Keepers are EOAs that monitor
the market, searching for insufficiently collateralized loans (liquidations are implemented as
contract calls, thus, they must be initiated by EOAs). In Compound, by design keepers can
repay only part of the borrowed position, and receive in return a fraction of the borrower’s
collateral at a discount with respect to the market price [68]. At the new market prices, either
the remaining borrower’s collateral is sufficient to back the fraction of loaned cryptoassets that
were not liquidated,24 or it will be subject to subsequent liquidations. Part of the fees can
be retained within the protocol.25 The PLF Aave exploits a similar mechanism to Compound,
but it grants higher discounts to liquidators. In other protocols, such as MakerDAO, keepers
can auction the collateral, repay the loan, and receive a fee for enforcing the liquidation [97].
In Compound, protocol usage is directly rewarded with governance tokens, as part of liquidity
mining programs to incentivize usage. Governance members can vote proposals on changes
regarding, e.g., the tokens accepted, the collateralization thresholds, parameters establishing
the interest rates, and other design aspects.
22
Flash loans are instead an uncollateralized lending mechanism enabled by DeFi that eliminates default risk:
loans are either atomically executed and repaid within one individual transaction or reverted [99].
23
See https://medium.com/compound-finance/borrowing-assets-from-compound-quick-start-guide-f5e
69af4b8f4
24
See https://zengo.com/understanding-compounds-liquidation/
25
See https://docs.compound.finance/v2/comptroller

14
 Collateral: Token i
Stake &
Collateralize Debt Token, sToken j

sToken k + Fee
Trade
sToken j

Flag for liquidation/liquidate

Liquidate
Fee
Debt Token, Fee

Debt Token, sToken j

Redeem
Collateral: Token i,
Fees, govToken

Set Parameters

Staker Derivatives Protocol Governance User Trader Keeper

Figure 7: Derivatives protocols. Stakers supply capital in a pooling contract for a reward, Traders can
swap derivative products like in DEXs. Similarly to PLFs, Liquidators auction insufficiently collateralized
positions.

Other Examples Aave [1] is among the largest PLFs by total value locked. It provides similar
financial services to Compound, and users can choose between stable and variable interest rates.
MakerDAO [85] is another lending protocol that allows locking capital to mint DAI. Other
relevant protocols categorized as PLFs are Alpha Homora [38] and Liquity [78].

5.3 Derivatives Protocols

We now consider the protocols that issue and facilitate the trading of financial derivative con-
tracts in a decentralized context. While DEXs and PLFs have been investigated deeply, the
academic literature on derivatives protocols is scarcer. DeFi derivatives are cryptoassets that
track the price of an underlying asset that can be another cryptoasset, a traditional financial
asset, a commodity, or priced real-world events [76]. The spectrum of derivatives protocols
ranges from call and put options over futures, forward contracts, and perpetual swaps [111].
Synthetic assets enable exposure to an asset without actual ownership. To trace the underlying
assets’ price, these DeFi protocols exploit Oracles, ie, smart contracts that act as a bridge ser-
vice between a DLT and the external world, allowing to retrieve real-world, off-chain data [107].
While centralized finance investors rely on intermediaries that accept and settle orders, deriva-
tives DeFi protocols substitute them with smart contracts that issue the financial instruments
at conditions determined automatedly, upon the provision of collateral as a protection against
risks.

Financial Services Figure 7 illustrates the interactions between a derivatives protocol and
the economic agents involved, using as a reference the protocol Synthetix [115]. This platform
focuses primarily on synthetic perpetual contracts, or synths, which allow users to bet on future
prices without an expiration date and to replicate the payoff of an underlying asset without
owning it. It supports real-world assets, such as fiat currencies and commodities, as well as
cryptoassets and indexes that track the general DeFi market dynamics.
As for PLFs, overcollateralization is a key element of the protocol design. Stakers must

15
provide ETH or SNX, the token native to the protocol, to issue synths (sTokens) representing
the derivative contract, and a “debt” token that tracks the amount of generated synths is issued
too.26 Both are tokenized assets. To unlock the staked collateral, users burn the synths as well
as the debt token. The debt issuance relies on a pooling mechanism: when investors issue synths,
debt tokens are generated as a fraction of the overall debt in the system. The latter fluctuates
to reflect the price changes of the underlying assets. Thus, when the price of an asset changes,
the individual staker’s debt is affected independently of the position held for this specific asset.
Stakers act thus as a pooled counterparty to all Synth exchanges [115].
Once synths are minted, Traders can swap them or bet on their future prices on dedicated
platforms that integrate and complement the contract issuing process. While the trading activity
is subject to the payment of a fee, the staking activity is rewarded in two main ways. First,
Stakers obtain a reward when they withdraw their collateral through a liquidity mining program:
Synthetix adopts an inflationary monetary policy, and stakers can claim the newly minted SNX
when they burn synth tokens to redeem their collateral. Second, Stakers earn a fraction of the
fees paid by the Traders, proportional to the staked capital. Fees are partly retained in the
protocol treasury and are used to pay a salary to some governance members.27
Derivatives protocols rely as well on other users to enforce incentive mechanisms. Arbitrage
further ensures price convergence: if synth prices diverge from the underlying assets, e.g., if a
synthetic asset is undervalued, arbitrageurs can buy it cheaply elsewhere and exploit it within
the protocol ecosystem, where market values are not considered. Additionally, insufficiently
collateralized positions are liquidated by Keepers that receive a fee for identifying them and to
initiate liquidations at a penalty for the staker. The penalty is then redistributed to the other
stakers, while the remaining collateral is returned to the liquidated account.28

Other Examples Other relevant derivatives protocols are dYdX [67] and Nexus [69]. The
former, similarly to Synthetix, offers perpetual contracts, and in addition, it allows to conduct
margin trades. The latter, instead, focuses on providing insurance instruments to hedge risk
in investment strategies. Barnbridge [18] offers tools to tokenize and hence hedge risk, while
Hegic [122] offers many different derivative contract options.

5.4 The DeFi Peer-to-Pool Model: A Generalization Framework

After describing the main DeFi protocol categories and their mechanism designs, we now abstract
the DeFi protocols and the financial services they provide in a generalized framework that applies
to most29 of them with minor specializations.
First, protocols typically provide services based on the ability to pool cryptoassets. Figure 8
illustrates this concept, which is defined as the peer-to-pool model [130, 128]. Smart contracts
are used to custody or escrow the cryptoassets of capital providers that lock up their funds, e.g.
to provide liquidity in DEXs or as collateral in PLFs. Asset pooling represents the primary way
to raise liquidity in the DeFi ecosystem, and it allows financial transactions not to depend on
matching mechanisms or interactions with a peer counterparty. Rather, DeFi services are auto-
mated and the outcomes are deterministic, as the financial functions follow the logic described
in the smart contract itself.
Service customers that actively demand liquidity, by accessing DeFi protocols services such
as the borrow or swap of cryptoassets, pay fees or interest rates upon usage. Capital providers
passively earn revenues and take part into liquidity mining programs, as a reward for taking
risks such as price risk for LPs, and since they improve the services provided by the protocols
26
See https://blog.synthetix.io/basics-of-staking-snx-2022/
27
See https://docs.synthetix.io/governance/ and https://kwenta.io/dashboard/markets/
28
See https://blog.synthetix.io/new-liquidation-mechanism/
29
With some exceptions, such as order book-based DeFi protocols.

16
 Incentive Mechanisms

Control
Lock
Parameters
Capital
Governance DeFi Users
Users Capital Providers
Earn
Fees Earn
DeFi Protocol Fees

Exploit Trigger State

Services Updates

Pay
Fees Earn
Fees

Pricing Mechanisms
DeFi Users Keepers/
Service Customers Arbitrageurs
Oracle Operators

Figure 8: DeFi Peer-to-Pool Model. Generalization of the interactions between economic actors
and the DeFi protocols. The DeFi users that exploit the protocols by demanding liquidity pay a fee for
accessing their services, while those that provide liquidity passively interact with them and earn an income
for supplying liquidity. All other economic agents (Governance users, Keepers, Arbitrageurs) are moved
by economic incentives to participate in the DeFi ecosystem.

by supplying liquidity. Their claims over the locked cryptoassets are typically handled with
tokenized assets that prove ownership and enable owners to withdraw the underlying asset.
Beyond the fees paid to capital providers, protocols incorporate other incentive mechanisms.
Keepers initiate for a fee transactions that cannot be triggered automatically by smart contracts,
and arbitrageurs conduct profitable trading activity, ensuring price convergence. Oracles are a
relevant component of DeFi as well. Their operators ingest data (state updates) and collect fees
for the service provided, enabling the interaction with off-chain data. Protocol token ownership
grants the governance members decision-making power and voting rights.
Finally, also pricing mechanisms are similar across protocols. Token supplies are handled by
burning and minting them to adjust scarcity. Stablecoins prices are stabilized using collateral
as a reserve or via alternative algorithmic methods such as dual coins. This mechanism allows
matching the price of any financial asset, also of derivatives contracts [104]. DEXs exploit
bonding curves and conservation pricing functions to price assets relative to one another, and
Oracles are exploited to incorporate external sources of information into the protocol.

6 DeFi Compositions
Up to now, we have considered DeFi protocols as distinct, independent entities. However, DeFi
protocols can also be arranged through so-called “DeFi compositions” to offer new financial
services that exploit financial functions provided by other DeFi protocols [44, 116]. Since com-
posability has become a central aspect of current DeFi developments [118], we now focus on
protocol interactions at the smart contract level.

17
 DeFi Ecosystem
Swap - Building block

0x74 0x11 0xc0

0x2d 0x7a 0x0d 0xda

1inch Uniswap DEX Trading wETH USDT

Router Router Pair wETH/UST Token Token

Figure 9: DeFi Composition Example. Illustration of two distinct transactions at the smart con-
tract level. The colored rectangles indicate protocol-specific smart contracts, and the colors are used to
distinguish those associated with different DeFi protocols (blue for 1inch and pink for UniSwap). To swap
tokens, a user can interact with UniSwap’s router or 1inch’s router: both produce the same interaction
with the UniSwap DEX Trading Pair contract. The top transaction is an example of DeFi composition.

6.1 Conceptualization
To illustrate the concept of a DeFi composition, we refer to Figure 9. It shows the execution
of two transactions at the smart contract level. Both trigger the same financial service, ie,
a swap of two tokens (wETH and USDT) executed by the UniSwap contract “DEX Trading
Pair”. The one on top is initiated by an EOA triggering the “Router” smart contract of the
1inch protocol, while the one on the bottom is directed to UniSwap’s “Router” contract. The
purpose of the 1inch contract is to compare prices across several DEXs and to route the user
to the one offering the best price for the swap. In this illustrative example, the target protocol
with the best prices is UniSwap. Thus, the transaction directed to 1inch is an example of a DeFi
composition: the 1inch protocol provides a novel financial service, ie, it compares prices and
liquidity across DEXs, and interacts with smart contracts associated with other DeFi protocols.
In the above example, a smart contract triggers multiple contracts that subsequently call
other contracts. This call cascade happens within the same transaction executed by the end user,
who controls one or more Externally Owned Accounts (EOA). Given this conceptualization, and
following [72], we define the notion of a “DeFi Composition” as follows:

Definition 3 A DeFi composition provides novel financial services by utilizing a combination

of multiple DeFi protocol-specific smart contracts within a single transaction.

6.2 Aggregators
At the time of writing, the most relevant implementation of DeFi compositions regards the
category of Aggregators. The example described above introduces 1inch, a DeFi application
that analyzes prices on different DEXs and automatically routes the users to the one offering
the best price. 1inch can be thought of as a demand-side Aggregator, that is, it redirects
users programmatically towards the DEX offering the best price for a cryptoasset. Even more
important are the supply-side Aggregators, also known as Yield Aggregators, ie services that
implement strategies to maximize the users return across multiple DeFi protocols.

18
 Devises strategy
Strategy Design
PLF optimization

Token x
Seek best strategy: select PLF1 & deploy funds

Deposit &
Execute Token x

cToken x
strategy Token

strategy Token
cToken x

Redeem Token x, interest - fee,

Token x + interest,
govToken (PLF)
govToken (Aggregator, PLF - fee)

Set Parameters

Investor Aggregator Governance User PLF1 PLF2

Figure 10: Yield Aggregators. The Governance proposes yield farming investment strategies to In-
vestors who lock their capital to a “Vault” smart contract. The Aggregator in turn interacts with other
DeFi protocols.

Yield Aggregators [127] aim to maximize the value of a cryptoasset portfolio by comparing
the returns of diversified financial services across multiple DeFi protocols. The concept of mov-
ing assets across protocols following optimized investment strategies is called yield farming [95].
The optimization strategies and the underlying assets differ across protocols, but their primary
mechanism is similar: users lock capital in a contract (also called Vault) that allocates it pro-
grammatically to a set of other DeFi financial instruments, according to user preferences, such as
risk profiles, and governance parameters [107]. Yield aggregators work similarly to traditional
investment funds, the key difference being that the peer-to-pool mechanism does not require
brokers or custodians.

Financial Services Figure 10 describes the general mechanisms of the yield aggregators and
the economic actors involved. It is based on the protocol Idle Finance [52]. Compared to DEXs
and PLFs, the Governance has a more prominent role, as the core financial service provided by
yield aggregators is the design and deployment of optimization strategies. These are proposed
by the protocol development team and/or voted by the governance members, and the yield
aggregator protocol acts as an automated fund manager. However, in some cases, strategies are
semi-automatic, and fund managers play an active role [107].
Once a strategy is devised, a Vault contract is created. In Idle’s Best Yield strategy,30 the
Vault collects single cryptoassets supplied by individual Investors, which in turn receive strategy
tokens, ie tokenized assets that represent fractional ownership of the total invested capital. These
are minted upon capital provision and can be burnt to redeem it. The strategy execution thus
depends critically on the liquidity pooling phase. More generally, the pool compositions may
differ across strategies, e.g., pools can collect tokens such as wrapped tokens and tokenized
assets, but also basket of tokens as in Rari Capital [36].
Once funds are collected, Yield aggregators deploy the funds in strategies that entail investing
them in other yield-bearing DeFi protocols. In the example described above, the yield farming
strategy involves the PLF Compound. Other Aggregators exploit also DEXs and their liquidity
30
See https://docs.idle.finance/products/best-yield

19
mining programs. For instance, Harvest Finance implements DEX-based strategies where funds
are deposited in liquidity pools and the protocol collects and redistributes liquidity mining
rewards.31 Thus, when investors redeem their funds, they profit in multiple ways: they receive
governance tokens from the Yield Aggregator itself, as well as revenues from investment in other
protocols both in the form of trading fees (DEXs) or interest rates (PLFs) and of governance
tokens of the targeted protocols. Yield Aggregators retain a performance fee on the revenues.

Other Examples Besides Idle Finance, Aggregators such as Pickle Finance [53] base their
strategies on investing in LP tokens associated with liquidity pools with the highest returns
on investment. Harvest Finance [51] offers the possibility to choose between both strategies.
Others, like Yearn Finance [54], offer several products that entail more complex strategies that
combine multiple protocols and exploit leveraged positions or explicitly base their yield strategies
on stablecoins such as Fei [105] or wBTC such as Badger [16].

6.3 Investigating DeFi Compositions

The example illustrated in Figure 9 shows a simple nested structure in which 1inch uses the
“swap” financial functionality of UniSwap to interact with the DEX trading pairs wETH and
USDT, and Figure 10 describes how Aggregators exploit financial services provided by other
protocols. However, previous work [71] has shown that the compositions can be deeply nested
and involve several DeFi protocols at multiple levels of depth. The term “financial lego” is often
used to illustrate that multiple protocol-specific smart contracts can be assembled or composed,
offering some novel financial service. As discussed in Section 1, there is a clear need to investigate
and better understand such compositions. To do so, and following [72], we identified two possible
directions that we describe below.

Building Block Extraction Disentangling the building blocks of DeFi compositions is one
possible investigation approach. In this context, a building block is a general pattern that
appears in multiple transactions but consistently implements the same financial functionality.
Consider, for instance, again Figure 9: the “Swap” building block always has the same structure,
independently of the tokens involved in the swap. Noteworthy, building blocks can also contain
other building blocks in a nested structure. In [71], we proposed an algorithm to identify
such building blocks and measure their occurrence in Ethereum transactions. Building block
extraction can contribute to a better understanding of a new family of financial products and
could play an essential role in assessing systemic risks if DeFi is increasingly adopted.

The DeFi Contract and Protocol Networks Another possible investigation approach is
to analyze the interdependencies between smart contracts that can be attributed to specific
DeFi protocols. One can extract these interdependencies from transactions involving smart
contracts of DeFi protocols and construct a network abstraction in which a node represents
a smart contract and edges the aggregation of all transactions involving a specific source and
target contract. Further, one can merge all the contracts specific to the same protocol into a
single node and investigate the network interactions at the protocol level.
Figure 11 illustrates the protocol interaction network. It was constructed considering all the
Ethereum transactions executed between January and August 2021 and filtering those directed
to the set of smart contracts that can uniquely be associated with 23 known DeFi protocols.32
Edges represent internal transactions originated by the execution of a protocol-specific smart
contract, which in turn interacts with a smart contract associated with another DeFi protocol
31
See https://harvest-finance.gitbook.io/harvest-finance/general-info/how-to-use-1/how-to-depo
sit-withdraw
32
0x, 1inch, Balancer, Curvefinance, SushiSwap, UniSwap, Aave, Compound, Instadapp, MakerDAO, Barn-
bridge, dYdX, Futureswap, Hegic, Nexus, Syntetix, Badger, Convex, Fei, Harvestfinance, RenVM, Vesper, Yearn.

20
 vesper instadapp 38
barnbridge dydx

compound maker yearn

0x
nexus

uniswap futureswap
aave
badger 1inch

curvefinance
renvm sushiswap

harvestfinance balancer fei hegic 3

convex synthetix Degree

Figure 11: The DeFi Protocol Network. The plot represents the network of DeFi protocols (nodes)
and their interactions (edges). The network is constructed from a dataset of external transactions directed
to a set of smart contracts manually associated with 23 DeFi protocols and the subsequent internal trans-
actions. Nodes are constructed by aggregating all protocol-specific smart contracts, and edges represent
the aggregate transactions from source protocol contracts to target protocol contracts. Edges indicate DeFi
protocol interoperability. The node sizes and colors are scaled proportionally to the node degree. Nodes
are highly connected. In particular, DEXs (Uniswap, Sushiswap, 0x) and lending protocols (MakerDAO,
Aave) play a central role, and the aggregator 1Inch is relevant as well.

(as in the example shown in Figure 9). Thus, edges indicate the existence of DeFi compositions.
The network is highly connected: DeFi protocols heavily rely on each other.

6.4 Case Study: Assessing the Effect of Stablecoin Runs

To demonstrate the practical use of these investigation approaches, we present a case study
inspired by the recent events on the Terra blockchain where we quantify to what extent a
collapse of a specific stablecoin would affect the building blocks of known DeFi protocols. In
May 2022, Terra was the victim of a series of trading actions that caused strong selling pressure
that eventually led to the de-peg from USD, and the price of its native tokens LUNA and UST
fell close to zero in a few hours [25]. The market actors sold a large amount of UST on the DEX
Curve and were able to trigger a stablecoin run by inducing the UST holders to try and sell all
their holdings in LUNA and UST. We measure to what extent a hypothetical run on two widely
used stablecoins, USDC and DAI, would affect the DeFi ecosystem. We applied the building
block extraction algorithm introduced in [71]. For each of the 23 DeFi protocols in our dataset,
we measured the fraction of building blocks that contain one of the two tokens, either directly
(within the building block itself) or indirectly (within a nested building block).
The results for DAI and USDC are reported in Figure 12, respectively in the upper and
lower panels. While in many protocols the dependencies are minimal, with percentages lower
than 5%, few DeFi protocols exhibit significant dependency on stablecoins: Balancer building
blocks, for instance, heavily depend directly on both DAI (15%) and USDC (more than 30%).
This means that a large fraction of all the transactions directed to such protocol might be
compromised. MakerDAO building blocks contain both directly and indirectly DAI but not
USDC, while Instadapp depends on both, indirectly and indirectly (with percentages up to 25%).
Other protocols that exhibit significant dependency on stablecoins are Yearn, Curvefinance, and
Compound. In summary, these results illustrate the obvious: protocols with higher exposure to
these stablecoins are also those that would be more affected by potential shocks hitting the DeFi
ecosystem as a consequence of stablecoin runs. However, such an investigation approach allows
us to systematically assess and quantify interdependencies, which is a fundamental requirement
for decision and policymakers.

21
 30
Building blocks containing stabecoins (%)

20

DAI
10

stablecoin included
0
directly
30
indirectly

20

USDC
10

0
0x

h
ba ve
r
rn cer

r s
m ge

cu co d
ef ex

dx

rv es i

sh m
ce

tfi ap

e
st ic

m p
ne r

nt p
un etix

ve p

ye r
n
ha ur fe
ba ge

e
xu
nc

un

nc

ap

sy wa

wa

ar
in eg

su env
ak

sp
rv nv
aa

dy
an

es w
co id
ba lan
d

h
1i

na
po

ad

is

is
h
br

in

t
fu

DeFi protocols

Figure 12: Protocol exposure to stablecoin runs. For each of the 23 DeFi protocols in our dataset,
we measure the fraction of building blocks that are directly or indirectly dependent on DAI (top panel) and
on USDC (bottom panel). While most protocols do not rely heavily on stablecoins, a few of them have sig-
nificant dependencies on USDC (Balancer, Instadapp) and on DAI (Instadapp, MakerDAO, Compound).

7 An Interdisciplinary Research Agenda

DeFi builds on non-trivial technical primitives to offer financial services that cannot directly be
mapped to those provided by traditional financial institutions. We believe a deeper understand-
ing can only be brought about by a multi-disciplinary, deeply linked research agenda. Following
the DSR Model described in Section 2, we now delineate future research directions along with
each stack sub-layer.

7.1 Settlement Layer

Multichain DeFi Protocols and Cross-chain Interoperability Section 3 focuses mostly
on EVM-based DLTs. At the time of writing, Ethereum is still the most relevant blockchain
for DeFi, with a Total Value Locked (TVL) exceeding 40 billion USD. However, many other
blockchains provide similar DeFi services to those we described in the previous paragraphs.
The most relevant are compatible with the Ethereum Virtual Machine.33 They facilitate code
reusability, as the same project can easily be deployed on multiple chains: for instance, all the
main 1inch smart contracts are deployed both on Ethereum and on BSC. Non-EVM compatible
chains34 typically support fewer DeFi protocols because the entry barrier for migrating exist-
ing projects is higher. We can already point to some protocols deployed on these alternative
blockchains,35 and we note that many of the protocols described in Section 5 are now moving in
the direction of deploying their smart contracts in multiple DLTs (thus, we call them multichain
protocols).
33
Binance Smart Chain (BSC), Avalanche, Polygon, Cosmos, Cronos, Fantom, Arbitrum.
34
Terra, Solana, Cardano, Waves, Parallel, Algorand, DeFiChain, Near, EOS.
35
DEXs: Pancakeswap on BSC, QuickSwap on Polygon, Orca on Solana. Lending protocols: Venus on BSC,
Benqi on Avalanche, Anchor on Terra. Neutrino, on Waves, is an algorithmic price-stable protocol.

22
 The deployment of DeFi protocols on multiple chains leads to the problem that a DeFi proto-
col running on a separate ledger cannot communicate or call contracts of protocols deployed on
another ledger. Therefore, recent efforts aim to develop solutions that enhance interoperability
across blockchains [101]. The challenge lies in finding mechanisms that allow a source ledger to
change the state of a target ledger [21].
Atomic swaps are protocols based on sequences of transactions executed on multiple DLTs
that allow counterparts to coordinate on the exchange of native tokens in a trustless environ-
ment and without intermediaries [62, 117, 126]. Bridges are another interoperability approach.
ThorChain, for instance, is a DeFi project that enables the swap of native assets, such as ETH
and BTC, through a bridging blockchain. When such a swap occurs, BTC is sent into Thor-
Chain Vaults, and the first trade against RUNE, the native token of ThorChain, takes place;
then, a second trade is conducted from RUNE to ETH. Several DeFi protocols implemented
similar bridges that enable the migration of assets across different blockchains. Furthermore,
Sidechains [110] can be thought of as blockchains that are pegged to the main blockchain. Poly-
gon, for instance, is an EVM-based scaling sidechain solution for Ethereum. Users can exploit
smart contracts to lock cryptoassets in the main chain and, in turn, unlock them on the sidechain.
As it is EVM-compatible, it is possible to deploy smart contracts also in the sidechain. Ronin is
another example of sidechain and was built with Ethereum specifically for a popular blockchain
game (Axie Infinity). Sidechains like Polygon are called “Layer 2” solutions [108].
The aforementioned solutions do not implement interoperability by default, but rather al-
low independent, heterogeneous blockchains to communicate. Other projects aim to provide
interoperability instead as a built-in feature by implementing DLTs with a main chain and
application-specific chains that can interact by design. In Polkadot [123], for instance, the Re-
lay Chain plays a central role, and additional blockchains that interoperate by default, called
parachains, can be created. Cosmos [77] implemented a similar design. It targets generic
blockchain interoperability and is also based on a structure with a main blockchain, called the
hub, and different zones that can interact with the main chain. We note that ThorChain is part
of the Cosmos ecosystem.
Cross-chain interoperability has become a crucial aspect and an additional layer of complexity
in DeFi. Whilst at the time of writing these solutions lead to multiple, somewhat isolated
DeFi ecosystems (since smart contracts on one DLT cannot directly call contracts on another
one), interoperability is more and more important, and one relevant future research direction is
understanding how this aspect will affect the DeFi ecosystem.

Transaction Reordering and Mining Transaction reordering occurs when miners choose
which transactions to include and how to order them when new blocks are appended to the
blockchain. The profit generated by this practice is called miner extractable value (MEV).
Account states are updated via transactions that trigger state transitions: thus, state updates
are not independent of the order they are included in a block, and transaction ordering may affect
the outcome of trading activity involving DeFi actors, for instance, by leading to unintended
state updates [112]. This has implications both on miners’ incentives and on the DeFi users
trading activity, and from an economic perspective, these aspects can be approached using
game-theoretic analysis and related methodologies. In [29], for instance, the authors exploit
game theory to distinguish legitimate competition from attacks that aim at maximize MEV.
Previous research [98] has shown that rational miners are incentivized to deliberately fork a
blockchain, with consequences on its security, to replicate profitable transactions executed by
other DeFi users in newly added blocks. They show that techniques exploiting transaction
ordering such as front-, back- running and sandwitch attacks, liquidations and arbitrage actions
are relevant sources of MEV. Furthermore, centralized servers called relayers put miners in direct
contact with third parties that crawl the blockchain looking for MEV opportunities. The latter
pay miners to order transactions as they request. The game theoretical model introduced in [31]

23
investigates the economic incentives behind the adoption of such services; further research in
this direction is needed, in order to better understand this recent phenomenon.

7.2 Cryptoassets
Section 4 provides a taxonomy of cryptoassets. However, it is incomplete, and new standards
besides ERC-20 and ERC-721 that implement additional functionalities are emerging. Further,
many existing cryptoassets, and in particular tokenized assets, are typically assets that derive
their price from an underlying (crypto)asset and can then be regarded as a form of derivatives.
A systemization of knowledge in this sense would be beneficial, in order to identify multiple
cryptoasset categories and map them to different types of derivative contracts, based on their
design. Other relevant research directions relate, e.g., to portfolio choices on cryptoassets and
traditional assets [28], or aim at investigating what cryptoassets and how DeFi could facilitate
illicit activities [93].

7.3 DeFi Protocols

At the time of writing, relevant DeFi protocols such as Compound are launching new protocol
versions based on updated smart contracts that might implement innovative financial function-
alities. The figures provided in Section 5 could, therefore, become outdated soon.
Understanding the current structure and features of the DeFi protocols, as well as the new
ones, is a problem that can be modeled by economists through a mechanism design approach.
This might help designing protocols with desirable characteristics aiming e.g. at reaching the
social optimum [30]. Generalizing the protocol mechanism designs to optimize their functioning
and devise new features is also a relevant objective. Appropriate tools for modeling, simulation,
and implementation are needed to reach these goals [131]. It is also essential to devise financial
models that allow for mitigating financial risk associated with existing protocols, and to adapt
well-known methodologies from traditional finance to the innovative protocol designs of DeFi
protocols [58]. There is, however, a problem in applying mechanism design to blockchain, as the
“designer” can create its own tokens. This is not a possibility usually considered in standard
microeconomic theory, which limits the applicability of the standard mechanism design results
to blockchain; a model to overcome this limitation in the case of auctions is proposed in [28].
Another relevant aspect that should be investigated in greater detail regards how the gov-
ernance of DeFi protocols is managed and how this affects centralization [56]. Strictly related
to this is the role of the entities that develop and are behind the DeFi projects. Even if such
organizations manage large amounts of customer funds, they still seem to be run by small groups
of individuals, as the FTX collapse showed, and little is known about who is responsible for their
projects. A promising direction in this sense is, e.g., to compare whether the relative protocol
size in the DeFi ecosystem translates to their organization size, and to analyze the governance
token distributions across DeFi actors.
Finally, DeFi protocols are still a niche phenomenon if compared to traditional finance. It is
important to understand the extent to which DeFi can be democratized to a broader audience.
Surveys to understand how the public perceives the DeFi ecosystem, including what are the
common misconceptions and whether DeFi is perceived positively, or to better understand what
are the profiles of the investors and why are they turning to DeFi, would be greatly beneficial.
Concurrently, it is essential to assess to which extent investment fraudsters exploit DeFi in
comparison to other potential channels, and to investigate whether the risks for DeFi users are
different from those faced by users that invest more generally in cryptocurrencies.

7.4 DeFi Composability

Section 6 describes how composability has emerged as a relevant aspect of the DeFi ecosystem.
Analyzing DeFi protocol interdependencies is just the initial step in a more comprehensive sys-

24
temic risk assessment. Previous studies have shown, for instance, that given certain market
conditions, DeFi protocols that exploit over-collateralization might suffer from drying-up liquid-
ity issues and become insolvent [59]. Also, repeatedly tokenized assets can create dependencies
across DeFi actors [118] and raise stability concerns. Future research should focus on under-
standing systemic risk more profoundly, for instance by analyzing token flows [70] and protocol
dependencies, both within the crypto-ecosystem and by considering the potential spillovers from
and to the traditional financial system [41, 83]. Future research should also pay particular at-
tention on whether and in case how to further integrate DeFi in Fintech and in the traditional
financial ecosystem.

8 Conclusions
We systematized the technical primitives and financial functionalities provided by DeFi proto-
cols. We started by describing the underlying technical primitives. Then, we outlined the various
types of cryptoassets used in DeFi and focused on specific DeFi protocol categories providing
financial services such as exchanging or lending and borrowing cryptoassets to economic agents.
Next, we described how DeFi protocols could be assembled into complex financial constructs
through compositions. We also pointed out possible investigation and measurement methods
that could be applied to disentangle the building blocks of DeFi protocols or study the net-
work structure of the broader DeFi ecosystem. To illustrate the practical applicability of these
methods, we showed how a stablecoin run could affect other DeFi protocols. Finally, we provide
pointers on future research directions that could help to understand DeFi protocols and their
ecosystems, such as protocol dependencies and smart contract composability, in a comprehensive
systemic risk assessment and the investigation of interoperability aspects across DLTs.
DeFi integrates technical, financial, and socio-economic complexity in an unprecedented way.
This development could be neglected while DeFi was still a niche phenomenon without ties to
the fiat system. However, with the increasing integration of cryptoassets with the traditional
financial sector, we require novel methods to identify, investigate, and ultimately understand the
risks associated with these developments. The scientific method embedded in a multi-disciplinary
setting offers the most promising answer to this challenge.

25
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33
Previous volumes in this series
1065 The Bank of Amsterdam and the limits of Wilko Bolt, Jon Frost,
January 2023 fiat money Hyun Song Shin and Peter Wierts

1064 Monetary policy and credit card spending Francesco Grigoli and
January 2023 Damiano Sandri

1063 Regulating Big Tech Luigi Zingales

December 2022

1062 Systemic Fragility in Decentralized Markets Alfred Lehar and Christine A Parlour
December 2022

1061 Cryptocurrencies and Decentralized Finance Igor Makarov and

December 2022 Antoinette Schoar

1060 The burst of high inflation in 2021–22: How Ricardo Reis

December 2022 and why did we get here?

1059 FX Intervention to Stabilize or Manipulate the Damiano Sandri

December 2022 Exchange Rate? Inference from Profitability

1058 The Lion’s Share: Evidence from Federal Şenay Ağca and Deniz Igan
December 2022 Contracts on the Value of Political
Connections

1057 Macro-financial stability frameworks: Claudio Borio, Ilhyock Shim and

December 2022 experience and challenges Hyun Song Shin

1056 Understanding the food component of Emanuel Kohlscheen

December 2022 inflation

1055 The pandemic, cash and retail payment Raphael Auer, Giulio Cornelli and
December 2022 behaviour: insights from the future of Jon Frost
payments database

1054 Inflation risk and the labor market: beneath Sirio Aramonte
November 2022 the surface of a flat Phillips curve

1053 How abundant are reserves? Evidence from Gara Afonso , Darrell Duffie,
November 2022 the wholesale payment system Lorenzo Rigon and Hyun Song Shin

1052 Systemic risk in markets with multiple central Iñaki Aldasoro and
November 2022 counterparties Luitgard A M Veraart

All volumes are available on our website www.bis.org.