What is it about?

Decentralized Finance (DeFi) is a new paradigm that offers blockchain-based financial services like borrowing, lending, or investing, without relying on traditional intermediaries like banks. Often compared to “Financial Legos”, these individual services can automatically interact with each other and offer complex, deeply nested financial products. In this paper we disentangle such interactions, in order to identify the basic building blocks of DeFi, and we investigate their compositions.

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Why is it important?

DeFi is a critical development: its automation might reduce inefficiencies, and the blockchain technology ensures that financial transactions are transparent and fully auditable by everyone. However, DeFi also introduces enormous complexity that makes interpretation, evaluation, and risk assessment of DeFi composed financial products increasingly tricky. If the interactions of DeFi protocols are not understood and adopted more broadly, they could have unforeseeable systemic effects on financial markets and our society as a whole, as seen in the 2008 financial crisis.


I hope this work will help the community to understand in more depth the potentiality, but also the associated risks, of blockchain-based financial products, in order to try to prevent future crises that might stem from the decentralized financial system.

Pietro Saggese
Complexity Science Hub Vienna

Read the Original

This page is a summary of: Disentangling Decentralized Finance (DeFi) Compositions, ACM Transactions on the Web, October 2022, ACM (Association for Computing Machinery),
DOI: 10.1145/3532857.
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