Thomas Rivera
Assistant Professor of Finance, McGill University
Talk title
Equilibrium in a DeFi Lending Market
Abstract
We provide an economic model of a Decentralized Lending Protocol (DLP) and analyze its novel pricing mechanism. We show that the mechanism admits a unique equilibrium under general conditions, allowing for risk aversion and incomplete information. Additionally, we demonstrate that when borrowers and lenders are fully informed about the state of the credit market, then the DLP can generate approximately efficient interest rates even if the DLP pricing mechanism cannot condition on the state of the credit market. In contrast, we show that if users face uncertainty about the state of the credit market, then any DLP pricing mechanism must generate interest rates that are inefficient. Given these findings, our results highlight that the key inefficiency of the DLP pricing mechanism arises from uncertainty faced by DLP users as opposed to the inability of the DLP to condition on the state of the credit market (i.e., the oracle problem).
Bio
Thomas Rivera is an Assistant Professor of Finance at the Desautels Faculty of Management of McGill University. His research focuses on theoretical issues of DeFi & Blockchain, banking/financial stability, corporate finance, and incomplete information. He is a member of the Finance Theory Group.