Findings on DeFi intermediation function
| Research framework (adapted from Rindfleisch and Heide, 1997) | Theoretical lenses (transaction costs, asymmetry of information) | Selected DeFi cases | DeFi intermediation function |
|---|---|---|---|
| Environmental uncertainty | Intermediaries can perform operations such as purchasing securities at a lower cost than through direct and individual channels (Benston and Smith, 1976), due in particular to economies of scale | “PowerPool is a decentralized protocol for automatically managed token portfolios and smart indices” | Automatization/reduction of the cost of operations |
“The primary function of any financial system is to facilitate the allocation and deployment of economic resources” (Merton, 1995) | With YFII Finance “Users can deposit supported tokens into DFI.money which automatically transfers these assets into the protocol that has the highest yield” | Automatic optimization of resource allocation | |
Transaction cost theory (Williamson, 1979) states that the optimal organizational structure is the one that achieves economic efficiency by minimizing the costs of monitoring information | “Robo-Advisor for Yield, or RAY for short, is a smart contract system that utilizes off-chain price oracles to automatically transfer your funds to the lending protocol offering the highest yield” | Oracle-based information provision | |
Intermediaries reduce transaction costs by providing liquidity (Merton, 1995) | “Hegic options can always be exercised at any moment during the period of holding a contract due to the liquidity locked inside the option contract itself” | Liquidity providing | |
A financial system provides a system for the exchange of goods and services (Merton, 1995) | “Flexa is an instant, fraud-proof payments network for digital assets” | Alternative payment infrastructure | |
Market makers lower relevant information costs (Benston and Smith, 1976) | “Value Liquid is an automated market-maker built on Ethereum” | Automated market maker | |
| Insurance companies are significant financial intermediaries, analysing risks so as to set their price properly and match properties with liabilities appropriately and so investments with liabilities, to facilitate uninterrupted development (Njegomir and Miškić, 2018) | “Nexus Mutual is an open platform on Ethereum that lets members pool and share risk through a discretionary mutual (a community-owned insurance alternative)” | Decentralized insurance pooling | |
| Behaviour uncertainty | The credit rating system mitigates the problem of information asymmetry (Chong et al., 2015) | TrueFi offers an “automated credit rating” | Algorithmic risk assessment |
| “Holders of Maker’s other token (MKR) govern the system by voting” and “Ratify risk parameters for new collateral types” | Consensus-based risk assessment | ||
Transaction cost theory (Williamson, 1979) states that the optimal organizational structure is the one that achieves economic efficiency by minimizing the costs of monitoring information | “Sell equity signals to Numerai Erasure Quant is a new decentralized marketplace for stock market data built on Ethereum. It allows anybody to upload signals, build a track record that anyone can verify and earn money” | Data quality assurance | |
| Environmental uncertainty Behaviour uncertainty | Aggregators are intermediaries that enable the group pooling of financial securities at a much lower transaction cost than would be required to purchase of each security in the basket directly and individually (Benston and Smith, 1976) | Badger DAO creates a “one stop app for all things Bitcoin in DeFi” | Aggregation of products/services |
| Intermediaries reduce transaction costs by facilitating the matching of buyers and sellers (Rubinstein and Wolinsky, 1987) | Uniswap “uses liquidity pools instead of order books” | Creation of a single pool as transaction counterparty | |
| “PerlinX is a decentralized finance interface platform, allowing users to trade assets of any kind with each other” | Counterparty matching | ||
Transaction cost theory (Williamson, 1979) states that the optimal organizational structure is the one that achieves economic efficiency by minimizing the costs of monitoring information | “DerivaDEX features real-time price feed” | Real-time information provision | |
Aggregators (such as mutual funds) can diversify the portfolio in terms of securities held, their amounts, at a much lower transaction cost than would be required to purchase each security in the basket directly and individually (Benston and Smith, 1976) | “Index Coop is a Decentralized and Autonomous Asset Manager governed, maintained and upgraded by its active community of INDEX token holders” | Decentralized Asset Manager |
| Research framework (adapted from | Theoretical lenses (transaction costs, asymmetry of information) | Selected DeFi cases | DeFi intermediation function |
|---|---|---|---|
| Environmental uncertainty | Intermediaries can perform operations such as purchasing securities at a lower cost than through direct and individual channels ( | “PowerPool is a decentralized protocol for automatically managed token portfolios and smart indices” | Automatization/reduction of the cost of operations |
| Insurance companies are significant financial intermediaries, analysing risks so as to set their price properly and match properties with liabilities appropriately | “Nexus Mutual is an open platform on Ethereum that lets members pool and share risk through a discretionary mutual (a community-owned insurance alternative)” | Decentralized insurance pooling | |
| Behaviour uncertainty | The credit rating system mitigates the problem of information asymmetry ( | TrueFi offers an “automated credit rating” | Algorithmic risk assessment |
| “Holders of Maker’s other token (MKR) govern the system by voting” and “Ratify risk parameters for new collateral types” | Consensus-based risk assessment | ||
| Environmental uncertainty | Aggregators are intermediaries that enable the group pooling of financial securities at a much lower transaction cost than would be required to purchase of each security in the basket directly and individually ( | Badger DAO creates a “one stop app for all things Bitcoin in DeFi” | Aggregation of products/services |
| Intermediaries reduce transaction costs by facilitating the matching of buyers and sellers ( | Uniswap “uses liquidity pools instead of order books” | Creation of a single pool as transaction counterparty | |
| “PerlinX is a decentralized finance interface platform, allowing users to trade assets of any kind with each other” | Counterparty matching | ||
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