Decentralized Finance — A Systematic Literature Review and Research Directions
Decentralized Finance (DeFi) is the (r)evolutionary movement to create a solely code-based, intermediary-independent financial system — a movement which has grown from $4bn to $104bn in assets locked in the last three years. We present the first systematic literature review of the yet fragmented DeFi research field. By identifying, analyzing, and integrating 83 peer-reviewed DeFi- related publications, our results contribute fivefold. First, we confirm the increasing growth of academic DeFi publications through systematic analysis. Second, we frame DeFi-related literature into three levels of abstraction (micro, meso, and macro) and seven subcategories. Third, we identify Ethereum as the blockchain in main academic focus. Fourth, we show that prototyping is the dominant research method applied whereas only one paper has used primary research data. Fifth, we derive four prioritized research avenues, namely concerning i) DeFi protocol interaction and aggregation platforms, ii) decentralized off-chain data integration to DeFi, iii) DeFi agents, and iv) regulation. — Eva Meyer, Isabell M. Welpe, Philipp G. Sandner
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With the intention to eliminate the need for financial intermediaries by creating a solely code-based, openly accessible, and transparent financial system, Nakamoto (2008) invented the Bitcoin blockchain — the first consensus-governed, decentralized database of cryptographically linked blocks storing and enabling borderless, trustless, all-time available, and digitally signed P2P-transactions. With the Turing-complete script language of the Ethereum blockchain, Buterin (2013) decisively evolved the idea and presented the first practical implementation of ‘smart contracts’ (i.e., code-based agreements executed without human intervention), hence providing the technical foundation for ‘Decentralized Finance (DeFi)’ — an almost in real-time operating finance ecosystem enabling any kind of complex financial products and transactions in a trustless and borderless manner (e.g., lending/borrowing, derivatives (trading) and borderless stable assets). That this threat to the legacy financial system is not only an idealistic idea of blockchain utopians but is to be taken seriously is, as of Nov, 5th 2021, reflected in i) Bitcoin’s $1,150bn market capitalization (CoinMarketCap, 2021a) exceeding the combined $1,135bn market worth of the world’s three highest valued banks1, ii) the market capitalization of the main DeFi blockchain Ethereum with $530bn — surpassing that of the highest valued bank1 and growing tenfold within one year (CoinMarketCap, 2021b), as well as iii) the Total Value Locked in DeFi applications — growing by 26 times in three years from $4bn to $104bn (DeFi Pulse, 2021).
To date, the following papers have provided overviews of the DeFi space: Chen and Bellavitis (2020), Schär (2021), and Jensen et al. (2021) characterize the structure, advantages, challenges, and use cases of DeFi from their own point of view and experience, i.e., not following a systematic, literature-guided approach. Bartoletti et al. (2020b) and Cousaert et al. (2021) present ‘Systemizations of Knowledge (SoKs)’ for the DeFi subspaces of lending protocols and yield aggregators, respectively. They thereby pursue a mixed approach of synthesizing academic literature and conducting own subspace analyses. Werner et al. (2021) conduct a SoK for the entire DeFi space, however, focusing on security challenges and delineating them into technical and economic ones. Systematic literature reviews, on the other hand, e.g., by Pal et al. (2021) and Ali et al. (2020), have not focused on DeFi but rather on finance blockchain applications in general, i.e., including applications still involving intermediaries. Hence, by the time of our writing and to the best of our knowledge, no study has systematically reviewed the state of increasing academic DeFi contributions — a review highly required to structure this fragmented field of research.
This paper closes this gap and identifies 83 peer-reviewed DeFi-related papers as a basis to address three research questions (RQ): RQ1) How can DeFi literature to date be structurally framed and which research methods and blockchain systems have scholars focused on? RQ2) Which results and insights can be synthesized from the current state of research? RQ3) Which research avenues can be derived? We thereby help scholars in gaining a systematic and cross-disciplinary overview of DeFi-related literature to date including non-conclusive research results, understudied areas, and underemployed research methods. Specifically, our paper offers five contributions: First, we confirm through systematic analysis that the number of academic DeFi publications is rapidly increasing. Second, we present the first systematically developed framework of DeFi literature: I.) the micro-level with research on financial a.) smart contracts, b.) tokens, and c) applications; II.) the meso-level with papers on a.) DeFi patterns within and b.) scaling solutions beyond single-chain systems; and III.) the macro-level with holistic research on a.) the DeFi ecosystem (e.g., DeFi participants) and b.) its wider societal impact (e.g., on the legacy financial system and regulatory bodies). Third, we find that scholars have focused on the Ethereum blockchain followed by blockchain system-independent research. Fourth, we show that prototyping/ proof-of-concepts (PoCs) are the dominating research method in this new field. Fifth, we suggest four research avenues to further support DeFi advancements.
The remainder of this paper proceeds as shown in Figure 1: Section 2 provides the theoretical background and research methodology. Section 3 presents the literature framework, applied research methods, and blockchain focuses (RQ1) as well as the synthesis of the current state of DeFi research (RQ2). Section 4 suggests future research avenues (RQ3). Section 5 discusses limitations and concludes.
The study contains 19 pages and can be downloaded here (795 KB, direct link to PDF).
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Eva Meyer currently pursues her PhD studies at the Technical University of Munich in cooperation with the Frankfurt School Blockchain Center. Her academic interests lie in the fields of DeFi and Crypto Asset-pricing as well as STOs, NFTs, Blockchain for ESG, and Blockchain/DeFi applications in the Metaverse. Next to her academic work, she is a mentor at the DLT Talents program after participating in the first batch herself. Further, since 2018, she is a strategy consultant at the Boston Consulting Group (BCG), focusing on digitization and strategy topics primarily in the Banking and Insurance industries. You can contact her via mail (firstname.lastname@example.org) or via LinkedIn (https://www.linkedin.com/in/eva--meyer/).
Prof. Dr. Isabell M. Welpe has been the chair of the Strategy and Organization research group at the Technical University of Munich, Germany since 2009 and the Academic Director of the Bavarian State Institute for Higher Education Research and Planning (IHF) since 2014. In 2017, she was elected among the 40 leading HR-Personalities (Award of the Journal Personalmagazin) and in 2019 she was awarded with the Bavarian State Medal for Services to the Bavarian Economy. The expertise of Professor Welpe includes digital transformation of companies, business model innovation, tokenization of assets, emerging digital technologies, the impact of blockchain on the economy and organizations and the future of leadership and work/organizational design. You can contact her via mail (email@example.com), via LinkedIn (https://www.linkedin.com/in/isabell-welpe-83a202), or follow her on Twitter (@IsabellWelpe).
Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund, 21e6 Capital and Blockchain Founders Group — companies active in venture capital financing for blockchain startups and crypto asset investment management. The expertise of Prof. Sandner includes crypto assets such as Bitcoin and Ethereum, decentralized finance (DeFi), the digital euro, tokenization of assets, and digital identity. You can contact him via mail (firstname.lastname@example.org) via LinkedIn or follow him on Twitter (@philippsandner).