Positive Risk-Free Interest Rates in Decentralized Finance

Decentralized Finance (DeFi) aims to use advancements in both computation and cryptography to tackle standard economic problems. It must, therefore, operate within the intersection of constraints required by both the computer science and economic domains. We explore a foundational question at the junction of those fields: is it possible to generate a positive risk-free yield via smart contracts? We show using a stylized model representing a large class of existing decentralized consensus algorithms that a positive risk-free rate is not possible. This places strong bounds on what decentralized financial products can be built and constrains the shape of future developments in DeFi. Among other limitations, our results reveal that markets in DeFi are incomplete