FINANCIAL VULNERABILITY OF DEFI LENDING PROTOCOLS WITHOUT A LENDER OF LAST RESORT

Abstract

Gutsuliak A.I. FINANCIAL VULNERABILITY OF DEFI LENDING PROTOCOLS WITHOUT A LENDER OF LAST RESORT

Purpose. The aim of the article is to study the characteristic features of the architecture of DeFi lending protocols, to study the possibility of the existence of a depository institution without technical intermediaries, to study the possibility of DeFi functioning in a period of high volatility without a lender of last resort, to identify obstacles to integration into the modern banking system.

Methodology of research. General scientific research methods and special methods were used in the study, in particular: induction and deduction ‒ at the stage of collecting primary data and analysing them, comparative (to compare the situation of the Terra UST and Silicon Valley Bank collapse), abstract and logical ‒ in the process of formulating conclusions, descriptive-analytical, creative-critical, graphic, economic analysis.

Findings. The characteristic features of decentralized lending protocols are investigated. The main components of the DeFi architecture are identified. The key positive feature is highlighted – smart contracts. The existing problems of the decentralized lending market are revealed. The factors that can provoke financial destabilization in the cryptocurrency credit market are identified.

Originality. As a result of the conducted analysis of the main factors behind the collapse of the Terra credit protocol and the UST stablecoin, the existing problems of the decentralized lending market are revealed, and the critical need to establish a DeFi institution in the current architecture, which will play the role of a lender of last resort, is identified. The author identifies common problems that cause instability in both the classical banking system and the cryptocurrency market.

Practical value. The main provisions of the article can be used to better understand the features of the decentralized lending ecosystem, as well as the risks posed by its very architecture. The conclusions and recommendations made in the paper, based on the analysis of the Terra ecosystem bankruptcy, may be useful for projects that plan to issue their own algorithmic stablecoin. The article substantiates the critical need for an inter-network lender in DeFi, which will act as an institution to guarantee the safety of users' assets and prevent the spread of panic to the entire market in times of increased volatility in financial markets.

Based on the materials in this article and given the shortage of qualified personnel, Ukrainian banks can begin to explore the possibilities of integrating smart contracts into their lending procedures. In order to reduce the need for collateral exceeding the loan amount, the author proposes to introduce DID technology into lending protocols, which will allow forming the credit history of borrowers.

As a result of the conclusions drawn from the study, the need for deepening interaction with the real economy was identified, through deepening the study of the possibility of accelerating the processes of tokenization of classical assets with their subsequent use as collateral in lending protocols. The results of this work may become the basis for further research on the possibilities of integrating DeFi architecture or its individual fragments into the classical banking system.

Key words: DeFi, decentralized lending, liquidity pool, Terra, LUNA, UST, stablecoin, crypto assets, SVB.