Managing Risk in DeFi

Abstract

Decentralized financial application (DeFi) are a new type of consumer-facing financial application composed of as ‘smart contracts’ deployed on a permis- sionless blockchain. We situate the DeFi concept in the theoretical context of permissionless blockchain and provide a taxonomical overview of agents, in- centives and risks in DeFi applications. We identify four key risks with rele- vance for managers, practitioners and scholars contemplating a proactive en- gagement with decentralized financial applications. We contribute new founda- tional insights into a rapidly emerging field with far-reaching implications for consumer finance.

Keywords: DeFi, Blockchain Smart Contracts, Decentralized Finance