Crypto Winter Lessons – DeFi vs. CeFi

This paper analyzes the mechanisms behind the recent disruptions in the crypto asset markets, with a focus on developments from 2022 to September.

The paper assesses the role of centralized finance (CeFi) and decentralized finance (DeFi), as well as the disproportionate impact of turmoil in the cryptocurrency market on retail market participants. It examines the results of the recent downturn in the crypto asset market, also known as the “crypto winter”, including the high interconnectedness within the crypto asset ecosystem; complex financial engineering mechanisms that use leverage heavily and are based on the composability offered by DeFi (i.e. DeFi components are combined to create new products); and increased market concentration.

The paper also highlights the urgency of political action and offers policy recommendations.


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