Defi Defi-Ned : An Analytical Framework for the Definition and Characterization of Defi

In the past two years, decentralised finance (defi) has attracted increasing attention and scrutiny from academics, research institutions, policy makers, participants in the crypto industry and traditional financial institutions. Nevertheless, no univocal definition of defi has been provided. Defi has been typically defined in quite generic and broad terms, and it is often used and intended as a synonym of blockchain-based financial service. This is problematic as the very first service ever operated over a blockchain (the transaction of a few bitcoins between two wallets in 2009) is also, technically speaking, a financial service. In fact, it is a payment activity. As a result, the question remains: what does defi really mean? Is there a way to unambiguously distinguish financial services operated over the blockchain from defi proper? This paper addresses this question and provides a formal framework to characterize and narrowly define defi. The work decomposes defi in three main analytical dimensions: the service (what is provided), the system (how it is provided – operational how), and the overall socio-technical ecosystem (by what, by whom and why it is provided – also called “procedural how”). Through an analysis of the necessary conditions characterizing each of the three defi dimensions, the work provides the following characterization of defi. In contrast to standard blockchain transactions, defi entails the decentralised provision of non-atomic (inter-temporal) contractual services involving the temporary exchange of (in personam) rights over the (temporary) use of tokenised capital between the capital owner and a smart contract address. It does so through a peer-to-protocol architecture and the issuance of claim-tokens representing redemption claims exercisable by the “peer” against the defi smart contract protocol that implements and operates non-custodial solutions for the (temporary) safekeeping of the funds. This system is implemented and operated over a public-permissionless blockchain and is usually characterised by on-chain governance solutions consistent with decentralised autonomous organization arrangements (DAOs). Based on that, the work also highlights all the possible dimensions of decentralization characterizing defi services