Contagion and loss redistribution in crypto asset markets
New publication by Katrin Schuler, Matthias Nadler and Fabian Schär in Economics Letters, Volume 231, 2023
Highlights
- Investigation of decentralized and centralized finance (DeFi/CeFi) intersection.
- Extension of model by Eisenberg and Noe (2001) to DeFi/CeFi mixed network.
- Integration of DeFi characteristics around non-recourse loans and liquidations.
- Framework to measure loss redistribution between institutions, savers, and borrowers.
- Crypto market interconnectivity is a major contributor to shock propagation risks.
«Abstract: This paper addresses the growing concern of shock propagation in crypto asset markets. The integration of conventional financial institutions (CeFi) and decentralized financial protocols (DeFi) has introduced a set of complexities that are not adequately accounted for in current models. We build on the well-established framework by Eisenberg and Noe (2001) and propose a generalized extension that can be applied to mixed DeFi/CeFi networks. Our model serves as a tool for comprehending potential contagion channels and loss redistribution resulting from the non-recourse nature of DeFi loans.»