The paper provides an overview of cryptocurrencies and decen tralized finance (DeFi). The discussion lays out potential benefits and challenges of the new system and presents a comparison to the traditional system offinancialintermediation.OuranalysishighlightsthatwhiletheDeFiarchitecture might have the potential to reduce transaction costs, similar to the traditionalfinancialsystem,thereareseverallayerswhererentscanaccumulatedue toendogenousconstraintstocompetition.Weshowthatthepermissionlessand pseudonymousdesignofDeFigenerateschallengesforenforcingtaxcomplianceandanti-moneylaunderinglawsandpreventingfinancialmalfeasance. WehighlightwaystoregulatetheDeFisystemwhichwouldpreserveamajority ofbenefitsoftheunderlyingblockchainarchitecturebutsupportaccountability andregulatorycompliance.
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Makarov et al. (2022) studied this question.
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