QRFE Seminar by Fahad Saleh (Wake Forest University)

Equilibrium in a Decentralized Finance Lending Market

Abstract: We examine a lending platform on blockchain. Notably, a blockchain lending platform suffers a disadvantage relative to a traditional lending platform in that a blockchain lending platform is unable to incorporate off-chain information when setting borrowing and lending rates. We demonstrate that the referenced disadvantage implies that a blockchain lending equilibrium is sub-optimal when compared to a competitive lending market equilibrium. We also offer a modification of the blockchain interest rate setting specification, and we demonstrate that this modification generates equilibrium interest rates, and therefore welfare, that is arbitrarily close to a competitive lending market equilibrium.