DeFi Primitives Without Parallels: An Overview of AMMs, Consensus Algorithms, and Flash Loans
Published in Proceedings of the 2022 Academy of Finance Conference (Authors: Anthony Hoang, Renita Murimi), 2022
Decentralized finance (DeFi) has been hailed as a bold direction in the future of fintech, bringing with it the promise of democratized access to capital. The appeal of DeFi lies in its potential to rethink current financial paradigms and introduce new ones. The focus of this paper is on the elements that set DeFi apart from traditional elements of banking and finance. While there are many such elements, we sought to uncover the constructs that have little to no semblance with traditional financial processes. Specifically, we focused on automated market makers, consensus algorithms powering the blockchains, and flash loans that stand in stark contrast to order books, centralized governance, and collateral-based lending, respectively. This paper provides an overview of these unique DeFi primitives that have little in common with the world before blockchain, and present implications for responsible innovation in blockchain-powered fintech applications.