Archive for January 20th, 2023

The Technology of Decentralized Finance (DeFi)

January 20, 2023

Raphael Auer, Bernhard Haslhofer, Stefan Kitzler, Pietro Saggese and Friedhelm Victor in this BIS paper:

Decentralized Finance (DeFi) is a new financial paradigm that leverages distributed ledger technologies to offer services such as lending, investing, or exchanging cryptoassets without relying on a traditional centralized intermediary. A range of DeFi protocols implements these services as a suite of smart contracts, ie software programs that encode the logic of conventional financial operations. Instead of transacting with a counterparty, DeFi users thus interact with software programs that pool the resources of other DeFi users to maintain control over their funds.

This paper provides a deep dive into the overall architecture, the technical primitives, and the financial functionalities of DeFi protocols. We analyse and explain the individual components and how they interact through the lens of a DeFi stack reference (DSR) model featuring three layers: settlement, applications and interfaces. We discuss the technical aspects of each layer of the DSR model. Then, we describe the financial services for the most relevant DeFi categories, ie decentralized exchanges, lending protocols, derivatives protocols and aggregators.

The latter exploit the property that smart contracts can be “composed”, ie utilize the functionalities of other protocols to provide novel financial services. We discuss how composability allows complex financial products to be assembled, which could have applications in the traditional financial industry. We discuss potential sources of systemic risk and conclude by mapping out an agenda for research in this area.

Posted in Academic research & research papers, Financial Markets/ Finance | 1 Comment »

What Drives Startup Fundraising in India?

January 20, 2023

Rajas Saroy, Ashish Khobragade, Rekha Misra, Sakshi Awasthy and Sarat Dhal in the RBI Bulletin article:

This article presents an analysis of fundraising by the Indian startups over the past decade, along with an overview of the venture capital financing model. The article empirically derives the important factors that determine the quantum of start-up funding at the economy-wide level as well as at the firm level.

Highlights:

    1. There has been an upward level shift of fundraising by the Indian start-ups post-2014. This has been contributed to by the Startup India initiative, along with other enabling policies and the increasing digitalisation of the economy. COVID-19 provided a temporary boost to fundraising.
    2. At the aggregate level, long-run start-up funding is largely driven by the excess return offered by the domestic equity market over the global benchmark, and by the level of domestic economic activity.
    3. At the firm level, unconventional factors like the educational background of founders, pre-existing relationships with institutional investors and popularity matter for fundraising, in addition to the scale already achieved and the sector of operation.

 

Posted in Academic research & research papers, Indian Economy/Financial Markets | Leave a Comment »

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