Abstract
Financial services that are not only related to crypto-currencies but
rely on blockchain for security and integrity are jointly referred to as
Decentralized Fiance (DeFi) and are evolving rapidly. Given their novel
applications of DLT and sophistical economical designs, the distinction
between DeFi services and understanding the involved risk are often
complex. This paper systematically studies the major classes of DeFi
protocols, including risk and security. The selection of DeFi categories
is based on a quantitative approach, covering over 80% of total value
locked (TVL) in DeFi. Further, a structured methodology is provided to
differentiate between DeFi protocols based on the algorithmic design and
blockchain-network architecture. The findings indicate that every DeFi
protocol falls into one of the three classes of DeFi algorithms:
liquidity pool, synthetic asset or aggregator protocol. This work
concludes with the risk analysis that is derived from the DeFi protocol,
underlying tokens and agents. Certain DeFi assets, such as crypto-backed
stablecoins, liquid staking tokens, and wrapped tokens of bridges, are
synthetic assets, similar to derivatives in traditional finance, and
bore similar risk exposure.