Decentralize finance and new lending protocols

Abstract

Purpose- Satoshi Nakamoto initially proposed the most well-known blockchain technology application after financial crisis in 2008 as the technology underlying Bitcoin, a virtual currency exchanged within a peer-to-peer network. To fill the trust gap between parties willing to exchange value, new applications have been developed through the blockchain in many different commercial industries, following in the footsteps of Bitcoin. Blockchain has countless potential uses and benefits, but like other innovations such as the World Wide Web, its adoption is a gradual and hard process that is always evolving. In this regard, the academic literature focuses mostly on the technical aspects of the it while the study of its business-related challenges is still in its infancy. By providing a framework that outlines the new lending procedures and its economic potential, study aims to participate the academic literature on finance applications of blockchain in banking sector. Methodology- To obtain the results of the returns of S&P 500 and DeFi assets, the methodology involves an analysis of decentralized finance assets through a framework that explains the outlining the lending protocols in decentralized finance and a comparison of centralized finance vs. decentralized finance. Findings- Blockchain technology and smart contracts are two components of the decentralized finance (DeFi) movement, which aims to establish a decentralized, open, and accessible financial system. Unlike traditional financial systems, which are centralized, opaque, and often difficult to access, DeFi is open to anyone with an internet connection. One of the key areas of DeFi is lending and borrowing, where users can exchange cryptocurrencies with fixed or variable interest rates without the need for a central authority or intermediary. Additionally, DeFi eliminates the need for credit history checks and third-party verification because loans are granted based on excessive collateral or other methods of ensuring repayment. The use of blockchain technology also increases the efficiency of transactions and reduces transaction costs. Conclusion- This study discusses the concept of decentralized finance (DeFi), which is an innovative way of delivering financial services through blockchain technology. It allows for peer-to-peer transactions to be conducted remotely and securely and is considered a paradigm shift in the financial industry. Currently, DeFi mostly replicates traditional financial services, but as it continues to expand, new and innovative applications are emerging. The growth and evolution of DeFi is dependent on factors such as the characteristics of blockchain technology, legal standards, and cultural differences between traditional and decentralized finance. In the future, it is expected that DeFi will continue to grow and potentially disrupt traditional financial institutions. Keywords: Banking, decentralized finance, blockchain, lending protocols, peer-to-peer lending JEL-Codes: G23, G14, O31