Disentangling Decentralized Finance (DeFi) Compositions
Stefan Kitzler, Friedhelm Victor, Pietro Saggese, Bernhard, Haslhofer

TL;DR
This paper analyzes DeFi protocol compositions on Ethereum, introduces an algorithm to decompose complex interactions into building blocks, and demonstrates its utility through case studies and visualizations, enhancing understanding of DeFi ecosystem complexity.
Contribution
It proposes a novel algorithm to decompose DeFi protocol interactions into nested building blocks, facilitating analysis of complex DeFi compositions and their potential risks.
Findings
DeFi protocols like exchanges and lending have high centrality.
Swaps are identified as the most common building blocks.
Nested composition structures reveal ecosystem complexity.
Abstract
We present a measurement study on compositions of Decentralized Finance protocols, which aim to disrupt traditional finance and offer services on top of distributed ledgers, such as Ethereum. DeFi compositions may impact the development of ecosystem interoperability, are increasingly integrated with web technologies, and may introduce risks through complexity. Starting from a dataset of 23 labeled DeFi protocols and 10,663,881 associated Ethereum accounts, we study the interactions of protocols and associated smart contracts. From a network perspective, we find that decentralized exchanges and lending protocols have high degree and centrality values, that interactions among protocol nodes primarily occur in a strongly connected component, and that known community detection methods cannot disentangle DeFi protocols. Therefore, we propose an algorithm to decompose a protocol call into a…
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Taxonomy
TopicsComplex Systems and Time Series Analysis · Blockchain Technology Applications and Security · Digital Platforms and Economics
