Towards a Theory of Decentralized Finance

Massimo Bartoletti; James Hsin yu Chiang; Alberto Lluch Lafuente

doi:10.1007/978-3-662-63958-0_20

Towards a Theory of Decentralized Finance

Massimo Bartoletti, James Hsin yu Chiang^*, Alberto Lluch Lafuente

^*Corresponding author for this work

Department of Applied Mathematics and Computer Science

University of Cagliari

Research output: Chapter in Book/Report/Conference proceeding › Article in proceedings › Research › peer-review

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Abstract

Decentralized Finance (DeFi) has brought about decentralized applications which allow untrusted users to lend, borrow and exchange crypto-assets. Many of such applications fulfill the role of markets or market makers, featuring complex, highly parametric incentive mechanisms to equilibrate interest rates and prices. This complexity makes the behaviour of DeFi applications difficult to understand: indeed, ill-designed incentive mechanisms could potentially lead to emergent unwanted behaviours. We argue that theories, techniques and tools rooted in formal methods can provide useful instruments to better understand, specify and analyze DeFi systems. We summarize in this paper our first steps towards a theory of DeFi based on formal methods, and we overview the open challenges and opportunities for formal methods in DeFi.

Original language	English
Title of host publication	Financial Cryptography and Data Security
Editors	Matthew Bernhard, Andrea Bracciali, Lewis Gudgeon, Thomas Haines, Ariah Klages-Mundt, Shin'ichiro Matsuo, Daniel Perez, Massimiliano Sala, Sam Werner
Publisher	Springer
Publication date	2021
Pages	227-232
ISBN (Print)	9783662639573
DOIs	https://doi.org/10.1007/978-3-662-63958-0_20
Publication status	Published - 2021
Event	2^nd Workshop on Coordination of Decentralized Finance - Virtual event Duration: 5 Mar 2021 → 5 Mar 2021

Conference

Conference	2^nd Workshop on Coordination of Decentralized Finance
Location	Virtual event
Period	05/03/2021 → 05/03/2021

Series	Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
Volume	12676 LNCS
ISSN	0302-9743

Bibliographical note

Funding Information:
Acknowledgements. The second author is supported by the PhD School of DTU Compute. The third author is partially supported by the EU H2020-SU-ICT-03-2018 Project No. 830929 CyberSec4Europe (cybersec4europe.eu).

Publisher Copyright:
© 2021, International Financial Cryptography Association.

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Bartoletti, Massimo ; Chiang, James Hsin yu ; Lafuente, Alberto Lluch. / Towards a Theory of Decentralized Finance. Financial Cryptography and Data Security. editor / Matthew Bernhard ; Andrea Bracciali ; Lewis Gudgeon ; Thomas Haines ; Ariah Klages-Mundt ; Shin'ichiro Matsuo ; Daniel Perez ; Massimiliano Sala ; Sam Werner. Springer, 2021. pp. 227-232 (Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics), Vol. 12676 LNCS).

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abstract = "Decentralized Finance (DeFi) has brought about decentralized applications which allow untrusted users to lend, borrow and exchange crypto-assets. Many of such applications fulfill the role of markets or market makers, featuring complex, highly parametric incentive mechanisms to equilibrate interest rates and prices. This complexity makes the behaviour of DeFi applications difficult to understand: indeed, ill-designed incentive mechanisms could potentially lead to emergent unwanted behaviours. We argue that theories, techniques and tools rooted in formal methods can provide useful instruments to better understand, specify and analyze DeFi systems. We summarize in this paper our first steps towards a theory of DeFi based on formal methods, and we overview the open challenges and opportunities for formal methods in DeFi.",

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note = "Funding Information: Acknowledgements. The second author is supported by the PhD School of DTU Compute. The third author is partially supported by the EU H2020-SU-ICT-03-2018 Project No. 830929 CyberSec4Europe (cybersec4europe.eu). Publisher Copyright: {\textcopyright} 2021, International Financial Cryptography Association.; 2<sup>nd</sup> Workshop on Coordination of Decentralized Finance, CoDecFin 2021 ; Conference date: 05-03-2021 Through 05-03-2021",

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Bartoletti, M, Chiang, JHY & Lafuente, AL 2021, Towards a Theory of Decentralized Finance. in M Bernhard, A Bracciali, L Gudgeon, T Haines, A Klages-Mundt, S Matsuo, D Perez, M Sala & S Werner (eds), Financial Cryptography and Data Security. Springer, Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics), vol. 12676 LNCS, pp. 227-232, 2^nd Workshop on Coordination of Decentralized Finance, 05/03/2021. https://doi.org/10.1007/978-3-662-63958-0_20

Towards a Theory of Decentralized Finance. / Bartoletti, Massimo; Chiang, James Hsin yu; Lafuente, Alberto Lluch.
Financial Cryptography and Data Security. ed. / Matthew Bernhard; Andrea Bracciali; Lewis Gudgeon; Thomas Haines; Ariah Klages-Mundt; Shin'ichiro Matsuo; Daniel Perez; Massimiliano Sala; Sam Werner. Springer, 2021. p. 227-232 (Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics), Vol. 12676 LNCS).

Research output: Chapter in Book/Report/Conference proceeding › Article in proceedings › Research › peer-review

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AU - Chiang, James Hsin yu

AU - Lafuente, Alberto Lluch

N1 - Funding Information: Acknowledgements. The second author is supported by the PhD School of DTU Compute. The third author is partially supported by the EU H2020-SU-ICT-03-2018 Project No. 830929 CyberSec4Europe (cybersec4europe.eu). Publisher Copyright: © 2021, International Financial Cryptography Association.

PY - 2021

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N2 - Decentralized Finance (DeFi) has brought about decentralized applications which allow untrusted users to lend, borrow and exchange crypto-assets. Many of such applications fulfill the role of markets or market makers, featuring complex, highly parametric incentive mechanisms to equilibrate interest rates and prices. This complexity makes the behaviour of DeFi applications difficult to understand: indeed, ill-designed incentive mechanisms could potentially lead to emergent unwanted behaviours. We argue that theories, techniques and tools rooted in formal methods can provide useful instruments to better understand, specify and analyze DeFi systems. We summarize in this paper our first steps towards a theory of DeFi based on formal methods, and we overview the open challenges and opportunities for formal methods in DeFi.

AB - Decentralized Finance (DeFi) has brought about decentralized applications which allow untrusted users to lend, borrow and exchange crypto-assets. Many of such applications fulfill the role of markets or market makers, featuring complex, highly parametric incentive mechanisms to equilibrate interest rates and prices. This complexity makes the behaviour of DeFi applications difficult to understand: indeed, ill-designed incentive mechanisms could potentially lead to emergent unwanted behaviours. We argue that theories, techniques and tools rooted in formal methods can provide useful instruments to better understand, specify and analyze DeFi systems. We summarize in this paper our first steps towards a theory of DeFi based on formal methods, and we overview the open challenges and opportunities for formal methods in DeFi.

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DO - 10.1007/978-3-662-63958-0_20

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T3 - Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)

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BT - Financial Cryptography and Data Security

A2 - Bernhard, Matthew

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A2 - Gudgeon, Lewis

A2 - Haines, Thomas

A2 - Klages-Mundt, Ariah

A2 - Matsuo, Shin'ichiro

A2 - Perez, Daniel

A2 - Sala, Massimiliano

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ER -

Bartoletti M, Chiang JHY, Lafuente AL. Towards a Theory of Decentralized Finance. In Bernhard M, Bracciali A, Gudgeon L, Haines T, Klages-Mundt A, Matsuo S, Perez D, Sala M, Werner S, editors, Financial Cryptography and Data Security. Springer. 2021. p. 227-232. (Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics), Vol. 12676 LNCS). doi: 10.1007/978-3-662-63958-0_20

Towards a Theory of Decentralized Finance

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