{"id":44872,"date":"2023-02-23T20:35:02","date_gmt":"2023-02-24T01:35:02","guid":{"rendered":"https:\/\/prefblog.com\/?p=44872"},"modified":"2023-02-23T20:35:02","modified_gmt":"2023-02-24T01:35:02","slug":"february-23-2023","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=44872","title":{"rendered":"February 23, 2023"},"content":{"rendered":"

The BoC has released a working paper by Jonathan Chiu, Emre Ozdenoren, Kathy Yuan and Shengxing Zhang titled On the Fragility of DeFi Lending<\/a>:<\/p>\n

We develop a dynamic model of decentralized finance (DeFi) lending that incorporates two\/these key features: 1) borrowing and lending are decentralized, anonymous, overcollateralized and backed by the market value of crypto assets where contract terms are pre-specified and rigid; and 2) information friction exists between borrowers and lenders. We identify a price-liquidity feedback: the market outcome in any given period depends on agents\u2019 expectations about lending activities in future periods, with higher price expectations leading to more lending and higher prices in that period. Given the rigidity inherent to smart contracts, this feedback leads to multiple self-fulfilling equilibria where DeFi lending and asset prices move with market sentiment. We show that flexible updates of smart contracts can restore equilibrium uniqueness. This finding highlights the difficulty of achieving stability and efficiency in a decentralized environment without a liquidity backstop.
\n…<\/b>
\nDecentralized finance (DeFi) is an umbrella term for a variety of financial service protocols and applications (e.g., decentralized exchanges, lending platforms, asset management) that operate on blockchain technology. They are anonymous permission-less financial arrangements implemented via smart contracts \u2014 immutable, deterministic computer programs\u2014on a blockchain that have been designed to replace traditional financial intermediaries (TradFi)
\n…<\/b>
\nThe growth of decentralized finance has been substantial since the \u201cDeFi Summer\u201d of 2020. According to data aggregator DeFiLlama, the total value locked (TVL) of DeFi had risen to 230 billion U.S. dollars as of April 2022, up from less than one billion two years prior to that time. As DeFi grows in scale and scope and becomes more extensively connected to the real economy, its vulnerabilities might undermine financial-sector stability (Aramonte, Huang, and Schrimpf (2021)). As a result, policymakers and regulators have raised concerns about the implications of DeFi for financial stability (FSB 2022; IOSCO 2022).2 Yet formal economic analysis of this issue remains very limited. In this paper, we examine DeFi lending protocols\u2014an important component of the DeFi eco-system\u2014and the sources and implications of their instability. For example, DeFi lending is much more volatile than traditional lending.3 In addition, Aramonte et al. (2022) argue that DeFi lending generates \u201cpro-cyclicality,\u201d the co-movement between crypto prices and lending activities.
\n…<\/b>
\nIn this paper, we study sources of fragility in DeFi lending caused by several of its fundamental features. These features are informational frictions, such as asymmetric information about collateral quality, oracle problems, and rigid contract terms. We demonstrate the inherent instability of DeFi lending that results from price-liquidity feedback exacerbated by informational frictions, leading to self-fulfilling sentimentdriven cycles. Stability requires flexible and state-contingent smart contracts. To achieve that end, a smart contract may take a complex form. Such a contract also requires a reliable oracle to feed realtime hard and soft information from the off-chain world. Alternatively, DeFi lending could abandon complete decentralization and re-introduce human intervention to provide real-time risk management\u2014 an arrangement that would force the protocol to rely on a trusted third party. Our finding highlights a trilemma faced by DeFi protocols: the difficulty involved in achieving simplicity in smart contracts and stability in asset prices while maintaining a high degree of decentralization.<\/p><\/blockquote>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
HIMIPref\u2122 Preferred Indices
\nThese values reflect the December 2008 revision of the HIMIPref\u2122 Indices<\/strong>
\nValues are provisional and are finalized monthly<\/td>\n<\/tr>\n
Index<\/td>\nMean
\nCurrent
\nYield
\n(at bid)<\/td>\n		Median
\nYTW<\/td>\n		Median
\nAverage
\nTrading
\nValue<\/td>\n		Median
\nMod Dur
\n(YTW)<\/td>\n		Issues<\/td>\nDay’s Perf.<\/td>\nIndex Value<\/td>\n<\/tr>\n
Ratchet<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n0.2985 %<\/td>\n2,583.3<\/td>\n<\/tr>\n
FixedFloater<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n0.2985 %<\/td>\n4,954.7<\/td>\n<\/tr>\n
Floater<\/td>\n8.72 %<\/td>\n8.93 %<\/td>\n60,539<\/td>\n10.36<\/td>\n2<\/td>\n0.2985 %<\/td>\n2,855.4<\/td>\n<\/tr>\n
OpRet<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n-0.0606 %<\/td>\n3,379.4<\/td>\n<\/tr>\n
SplitShare<\/td>\n4.98 %<\/td>\n6.60 %<\/td>\n56,482<\/td>\n2.77<\/td>\n7<\/td>\n-0.0606 %<\/td>\n4,035.7<\/td>\n<\/tr>\n
Interest-Bearing<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n-0.0606 %<\/td>\n3,148.8<\/td>\n<\/tr>\n
Perpetual-Premium<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n-0.0818 %<\/td>\n2,774.6<\/td>\n<\/tr>\n
Perpetual-Discount<\/td>\n6.15 %<\/td>\n6.26 %<\/td>\n72,313<\/td>\n13.50<\/td>\n37<\/td>\n-0.0818 %<\/td>\n3,025.5<\/td>\n<\/tr>\n
FixedReset Disc<\/td>\n5.36 %<\/td>\n7.69 %<\/td>\n85,890<\/td>\n11.82<\/td>\n59<\/td>\n0.3074 %<\/td>\n2,274.1<\/td>\n<\/tr>\n
Insurance Straight<\/td>\n6.02 %<\/td>\n6.19 %<\/td>\n90,262<\/td>\n13.57<\/td>\n20<\/td>\n0.0975 %<\/td>\n2,984.2<\/td>\n<\/tr>\n
FloatingReset<\/td>\n9.75 %<\/td>\n10.20 %<\/td>\n39,425<\/td>\n9.28<\/td>\n2<\/td>\n0.1857 %<\/td>\n2,627.3<\/td>\n<\/tr>\n
FixedReset Prem<\/td>\n6.43 %<\/td>\n6.36 %<\/td>\n220,311<\/td>\n4.00<\/td>\n2<\/td>\n-0.3581 %<\/td>\n2,361.7<\/td>\n<\/tr>\n
FixedReset Bank Non<\/td>\n0.00 %<\/td>\n0.00 %<\/td>\n0<\/td>\n0.00<\/td>\n0<\/td>\n0.3074 %<\/td>\n2,324.6<\/td>\n<\/tr>\n
FixedReset Ins Non<\/td>\n5.25 %<\/td>\n7.20 %<\/td>\n47,117<\/td>\n12.27<\/td>\n14<\/td>\n-0.2920 %<\/td>\n2,457.7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Performance Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nChange<\/td>\nNotes<\/td>\n<\/tr>\n
PWF.PR.S<\/td>\nPerpetual-Discount<\/td>\n-4.76 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.81
\nEvaluated at bid price : 18.81
\nBid-YTW : 6.46 %<\/td>\n<\/tr>\n
TRP.PR.G<\/td>\nFixedReset Disc<\/td>\n-3.41 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 17.00
\nEvaluated at bid price : 17.00
\nBid-YTW : 8.74 %<\/td>\n<\/tr>\n
SLF.PR.H<\/td>\nFixedReset Ins Non<\/td>\n-1.96 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 15.51
\nEvaluated at bid price : 15.51
\nBid-YTW : 8.24 %<\/td>\n<\/tr>\n
PWF.PR.L<\/td>\nPerpetual-Discount<\/td>\n-1.86 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 20.61
\nEvaluated at bid price : 20.61
\nBid-YTW : 6.26 %<\/td>\n<\/tr>\n
IFC.PR.A<\/td>\nFixedReset Ins Non<\/td>\n-1.62 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.27
\nEvaluated at bid price : 18.27
\nBid-YTW : 7.20 %<\/td>\n<\/tr>\n
MIC.PR.A<\/td>\nPerpetual-Discount<\/td>\n-1.50 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.70
\nEvaluated at bid price : 19.70
\nBid-YTW : 6.99 %<\/td>\n<\/tr>\n
MFC.PR.L<\/td>\nFixedReset Ins Non<\/td>\n-1.36 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 17.44
\nEvaluated at bid price : 17.44
\nBid-YTW : 8.14 %<\/td>\n<\/tr>\n
MFC.PR.M<\/td>\nFixedReset Ins Non<\/td>\n-1.21 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 17.95
\nEvaluated at bid price : 17.95
\nBid-YTW : 8.05 %<\/td>\n<\/tr>\n
PWF.PR.K<\/td>\nPerpetual-Discount<\/td>\n-1.19 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.97
\nEvaluated at bid price : 19.97
\nBid-YTW : 6.28 %<\/td>\n<\/tr>\n
FTS.PR.K<\/td>\nFixedReset Disc<\/td>\n-1.18 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 16.82
\nEvaluated at bid price : 16.82
\nBid-YTW : 8.27 %<\/td>\n<\/tr>\n
BN.PF.C<\/td>\nPerpetual-Discount<\/td>\n-1.13 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.30
\nEvaluated at bid price : 19.30
\nBid-YTW : 6.40 %<\/td>\n<\/tr>\n
PVS.PR.J<\/td>\nSplitShare<\/td>\n-1.11 %<\/td>\nYTW SCENARIO
\nMaturity Type : Hard Maturity
\nMaturity Date\t: 2028-02-29
\nMaturity Price : 25.00
\nEvaluated at bid price : 22.35
\nBid-YTW : 6.94 %<\/td>\n<\/tr>\n
IAF.PR.I<\/td>\nFixedReset Ins Non<\/td>\n1.13 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 22.75
\nEvaluated at bid price : 23.96
\nBid-YTW : 6.55 %<\/td>\n<\/tr>\n
BN.PR.M<\/td>\nPerpetual-Discount<\/td>\n1.34 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.87
\nEvaluated at bid price : 18.87
\nBid-YTW : 6.41 %<\/td>\n<\/tr>\n
GWO.PR.Y<\/td>\nInsurance Straight<\/td>\n1.55 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.05
\nEvaluated at bid price : 19.05
\nBid-YTW : 6.01 %<\/td>\n<\/tr>\n
RY.PR.J<\/td>\nFixedReset Disc<\/td>\n1.67 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.45
\nEvaluated at bid price : 19.45
\nBid-YTW : 7.57 %<\/td>\n<\/tr>\n
IFC.PR.G<\/td>\nFixedReset Ins Non<\/td>\n1.73 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 21.45
\nEvaluated at bid price : 21.75
\nBid-YTW : 7.15 %<\/td>\n<\/tr>\n
CIU.PR.A<\/td>\nPerpetual-Discount<\/td>\n3.11 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.55
\nEvaluated at bid price : 18.55
\nBid-YTW : 6.24 %<\/td>\n<\/tr>\n
CU.PR.E<\/td>\nPerpetual-Discount<\/td>\n5.55 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 20.16
\nEvaluated at bid price : 20.16
\nBid-YTW : 6.11 %<\/td>\n<\/tr>\n
IFC.PR.C<\/td>\nFixedReset Disc<\/td>\n28.57 %<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.00
\nEvaluated at bid price : 18.00
\nBid-YTW : 7.83 %<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n\n
Volume Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nShares
\nTraded<\/td>\n		Notes<\/td>\n<\/tr>\n
CU.PR.I<\/td>\nFixedReset Disc<\/td>\n55,000<\/td>\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2025-12-01
\nMaturity Price : 25.00
\nEvaluated at bid price : 24.90
\nBid-YTW : 4.64 %<\/td>\n<\/tr>\n
NA.PR.C<\/td>\nFixedReset Prem<\/td>\n44,100<\/td>\nYTW SCENARIO
\nMaturity Type : Call
\nMaturity Date\t: 2027-11-15
\nMaturity Price : 25.00
\nEvaluated at bid price : 25.77
\nBid-YTW : 6.36 %<\/td>\n<\/tr>\n
TD.PF.D<\/td>\nFixedReset Disc<\/td>\n22,200<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.33
\nEvaluated at bid price : 19.33
\nBid-YTW : 7.64 %<\/td>\n<\/tr>\n
TRP.PR.D<\/td>\nFixedReset Disc<\/td>\n18,500<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 16.33
\nEvaluated at bid price : 16.33
\nBid-YTW : 8.99 %<\/td>\n<\/tr>\n
FTS.PR.M<\/td>\nFixedReset Disc<\/td>\n17,850<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 17.72
\nEvaluated at bid price : 17.72
\nBid-YTW : 8.23 %<\/td>\n<\/tr>\n
TD.PF.L<\/td>\nFixedReset Disc<\/td>\n17,100<\/td>\nYTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 23.85
\nEvaluated at bid price : 24.30
\nBid-YTW : 6.99 %<\/td>\n<\/tr>\n
There were 3 other index-included issues trading in excess of 10,000 shares.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n\n\n\n\n\n\n\n
Wide Spread Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nQuote Data and Yield Notes<\/td>\n<\/tr>\n
PWF.PR.S<\/td>\nPerpetual-Discount<\/td>\nQuote: 18.81 – 20.00
\nSpot Rate : 1.1900
\nAverage : 0.7203<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.81
\nEvaluated at bid price : 18.81
\nBid-YTW : 6.46 %<\/td>\n<\/tr>\n

BN.PF.C<\/td>\nPerpetual-Discount<\/td>\nQuote: 19.30 – 20.30
\nSpot Rate : 1.0000
\nAverage : 0.6920<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 19.30
\nEvaluated at bid price : 19.30
\nBid-YTW : 6.40 %<\/td>\n<\/tr>\n

PWF.PR.F<\/td>\nPerpetual-Discount<\/td>\nQuote: 21.17 – 22.00
\nSpot Rate : 0.8300
\nAverage : 0.5660<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 21.17
\nEvaluated at bid price : 21.17
\nBid-YTW : 6.28 %<\/td>\n<\/tr>\n

CU.PR.G<\/td>\nPerpetual-Discount<\/td>\nQuote: 18.75 – 19.35
\nSpot Rate : 0.6000
\nAverage : 0.3970<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 18.75
\nEvaluated at bid price : 18.75
\nBid-YTW : 6.04 %<\/td>\n<\/tr>\n

BIK.PR.A<\/td>\nFixedReset Prem<\/td>\nQuote: 24.32 – 25.30
\nSpot Rate : 0.9800
\nAverage : 0.7924<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 23.85
\nEvaluated at bid price : 24.32
\nBid-YTW : 7.76 %<\/td>\n<\/tr>\n

MFC.PR.Q<\/td>\nFixedReset Ins Non<\/td>\nQuote: 21.81 – 22.52
\nSpot Rate : 0.7100
\nAverage : 0.5498<\/p>\n

YTW SCENARIO
\nMaturity Type : Limit Maturity
\nMaturity Date\t: 2053-02-23
\nMaturity Price : 21.49
\nEvaluated at bid price : 21.81
\nBid-YTW : 7.14 %<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"

The BoC has released a working paper by Jonathan Chiu, Emre Ozdenoren, Kathy Yuan and Shengxing Zhang titled On the Fragility of DeFi Lending: We develop a dynamic model of decentralized finance (DeFi) lending that …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"class_list":["post-44872","post","type-post","status-publish","format-standard","hentry","category-market-action"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/44872","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=44872"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/44872\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=44872"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=44872"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=44872"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}