Template-Type: ReDIF-Paper 1.0
Author-Name: Alfred Lehar
Author-X-Name-First: Alfred
Author-X-Name-Last: Lehar
Author-Name: Christine A Parlour
Author-X-Name-First: Christine A
Author-X-Name-Last: Parlour
Title: Systemic fragility in decentralised markets
Abstract: We analyze a unique data set of collateral liquidations on two Decentralized Finance lending platforms – Compound and Aave. Such liquidations require arbitrageurs to repay the loan in return for the discounted collateral. Using Blockchain transaction data, we observe if arbitrageurs liquidate positions out of their own inventory or obtain "flash loans." To repay flash loans, arbitrageurs immediately sell the collateral asset. We document the high frequency price impact of such liquidity trades on nine different decentralized exchanges. Consistent with large block trades in equity markets there is a temporary and permanent price impact of collateral asset sales in DeFi. We document the effect of these trades on return distributions. Our work highlights the systemic fragility of decentralized markets.
Creation-Date: 2022-12
File-URL: https://www.bis.org/publ/work1062.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1062.htm
File-Format: text/html
Number: 1062
Keywords: Decentralized lending, blockchain, decentralized finance, system risk
Classification-JEL: G1, G23
Handle: RePEc:bis:biswps:1062