Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending

Saengchote, K; Putniņš, T; Samphantharak, K

Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending

Saengchote, K Putniņš, T Samphantharak, K

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Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Journal of Behavioral and Experimental Finance, 2023, 40, pp. 100858
Issue Date:: 2023-12-01

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Field	Value	Language
dc.contributor.author	Saengchote, K
dc.contributor.author	Putniņš, T
dc.contributor.author	Samphantharak, K
dc.date.accessioned	2024-04-22T20:34:41Z
dc.date.available	2024-04-22T20:34:41Z
dc.date.issued	2023-12-01
dc.identifier.citation	Journal of Behavioral and Experimental Finance, 2023, 40, pp. 100858
dc.identifier.issn	2214-6350
dc.identifier.issn	2214-6369
dc.identifier.uri	http://hdl.handle.net/10453/178211
dc.description.abstract	Decentralized Finance (DeFi) is built on a fundamentally different paradigm. Rather than trusting individuals and institutions, DeFi participants, in principle, only need to trust computer code enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress-tests this alternative paradigm by revealing the identities of individuals (including a convicted criminal) associated with the Abracadabra lending protocol. The revelation seriously damaged the protocol, indicating that, in practice, DeFi does not (yet) entirely remove the need for trust in individuals. Our findings suggest that smart contracts are incomplete and are subject to protocol-run risk. Thus, individuals’ character and trust remain relevant in this alternative financial system.
dc.language	en
dc.publisher	Elsevier
dc.relation	http://purl.org/au-research/grants/arc/DP200101445
dc.relation.ispartof	Journal of Behavioral and Experimental Finance
dc.relation.isbasedon	10.1016/j.jbef.2023.100858
dc.rights	info:eu-repo/semantics/embargoedAccess
dc.subject	1502 Banking, Finance and Investment
dc.subject.classification	3502 Banking, finance and investment
dc.subject.classification	3801 Applied economics
dc.title	Does DeFi remove the need for trust? Evidence from a natural experiment in stablecoin lending
dc.type	Journal Article
utslib.citation.volume	40
utslib.for	1502 Banking, Finance and Investment
pubs.organisational-group	University of Technology Sydney
pubs.organisational-group	University of Technology Sydney/Faculty of Business
pubs.organisational-group	University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	embargoed	*
utslib.copyright.embargo	2025-12-01T00:00:00+1000Z
dc.date.updated	2024-04-22T20:34:37Z
pubs.publication-status	Published
pubs.volume	40

Abstract:

Decentralized Finance (DeFi) is built on a fundamentally different paradigm. Rather than trusting individuals and institutions, DeFi participants, in principle, only need to trust computer code enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress-tests this alternative paradigm by revealing the identities of individuals (including a convicted criminal) associated with the Abracadabra lending protocol. The revelation seriously damaged the protocol, indicating that, in practice, DeFi does not (yet) entirely remove the need for trust in individuals. Our findings suggest that smart contracts are incomplete and are subject to protocol-run risk. Thus, individuals’ character and trust remain relevant in this alternative financial system.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/178211