Tag: decentralized finance

Decentralized Insurance Alternatives: Market Landscape, Opportunities and Challenges

Mary Pat Campbell

Link: https://www.soa.org/resources/research-reports/2022/decentralized-ins-alt/

Report: https://www.soa.org/4a6cf6/globalassets/assets/files/resources/research-report/2022/decentralized-ins-alt.pdf

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Excerpt:

The DeFi ecosystem has been expanding rapidly in the past few years, growing from less than USD $1 billion in 2020 to USD $61.6 billion as of June 2022 as measured by Total Value Locked (TVL), the amount of crypto asset deposited in the DeFi protocols.

With continuous innovation in product design and delivery, the potential of DeFi adoption is massive. However, the rise of DeFi is marred by security issues. Nearly 200 blockchain hacking incidents have taken place in 2021 with approximately USD $7 billion in stolen funds (Cointelegraph, 2021). These hacking events have a wide range of causes including, but not limited to, the following:

  • Smart contract vulnerabilities exploited by hackers to steal funds
  • Manipulation of oracles to cause price feed deviation
  • Attack on governance where a small group of individuals took over the protocol’s governance decisionmaking mechanism

Author(s):

Alvin Kwock
OneDegree

Erik Lie, FSA, CERA
Hailstone Labs

Gwen Weng, FSA, CERA, FCIA
Hailstone Labs

Rex Zhang, ASA
OneDegree

Publication Date: Sept 2022

Publication Site: Society of Actuaries

A Risk Classification Framework for Decentralized Finance Protocols

Mary Pat Campbell

Link: https://www.soa.org/resources/research-reports/2022/decentralized-finance-protocols/

Report: https://www.soa.org/4a61da/globalassets/assets/files/resources/research-report/2022/decentralized-finance-protocols.pdf

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Decentralized finance (DeFi) is an emerging and rapidly growing financial ecosystem with the defining feature that it is powered by blockchain technology. The focus of this paper is on risks for DeFi protocols that could lead to economic losses that could be insurable. This framework was designed around the risks associated with the existing and emerging DeFi protocols.

Author(s):

Tara Chang
OneDegree

Joe Ho
Hailstone Labs

Zachary Tirrell, FSA, FIAA

Gwen Weng, FSA, CERA, FCIA
Hailstone Labs

Jo You
OneDegree

Publication Date: October 2022

Publication Site: Society of Actuaries

Decentralized Finance for Actuaries

Mary Pat Campbell

Link: https://www.soa.org/resources/research-reports/2022/decentralized-finance/

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Excerpt:

Decentralized finance, or DeFi, is an emerging financial system powered by blockchain technology. This research report aims to introduce actuaries to DeFi and help them develop a solid understanding of DeFi. It will begin with addressing “what is DeFi?” by providing an introduction on blockchains and DeFi. It will then discuss in further detail the key characteristics, applications, opportunities, and risks of DeFi. After providing the foundation, this report will discuss the potential adoption of DeFi and its interaction with the current financial system (sometime referred to as traditional finance for contrast with DeFi), and the implications for practicing and aspiring actuaries. In addition, a glossary of terms used in DeFi and a brief history of the development of DeFi have been included in the appendix.

Author(s):

Jen Houng (Erik) Lie, FSA, ZooFi Labs
Gwen Yun Weng, FSA, CFA, ZooFi Labs
Wai Chak Tse, ZooFi Labs

Publication Date: March 2022

Publication Site: SOA

The Opportunities and Dangers of Decentralizing Finance

Mary Pat Campbell
The Opportunities and Dangers of Decentralizing Finance

Excerpt:

Decentralized Finance — or DeFi — has experienced explosive growth in the past year. But in order for DeFi to fulfill its promise as a disintermediated ecosystem that helps rather than harms, “now is the time to evaluate its benefits and dangers,” write Wharton legal studies and business ethics professor Kevin Werbach and David Gogel, a recent Wharton MBA graduate, in the article that follows. Werbach is author of the book The Blockchain and the New Architecture of Trust and leads Wharton’s Blockchain and Digital Asset Project. Werbach and Gogel recently collaborated with the World Economic Forum to create the Decentralized Finance (DeFi) Policy-Maker Toolkit,  providing guidance to regulators and blockchain watchers everywhere.

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The market experienced explosive growth beginning in 2020. According to tracking service DeFi Pulse, the value of digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021. Novel business models such as yield farming — in which holders of cryptocurrencies earn rewards for providing capital to various services — and aggregation to optimize trading across exchanges in real-time are springing up rapidly. Innovations such as flash loans, which are either repaid or automatically unwound during the course of a transaction, open up both new forms of liquidity and unfamiliar risks.

Author(s): Kevin Werbach

Publication Date: 16 June 2021

Publication Site: Knowledge @ Wharton