The Bank of Canada working paper series presents another deep dive into complex crypto questions.
The Bank of Canada has released a working paper that examines lending protocols in decentralized finance with regard to sources of instability and their relation to crypto asset prices. Its findings point to potential ways to optimize DeFi lending platforms, or possibly the practical limits of decentralization.“On the Fragility of DeFi Lending” and released Feb. 22, acknowledged the inclusiveness DeFi offers and the advantages of smart contract protocols over the use of human discretion.
That is because borrowers are at least aware of the quality of the assets they used a loan collateral. Moreover, “Only tokenized assets can be pledged as collateral, and such assets tend to exhibit very high price volatilities.” Price and liquidity produce a feedback loop, the paper argued: the price of an asset affects borrowing volume and that, in turn, affects asset price.
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