Managing Risk in DeFi Portfolios

TL;DR

This paper reviews DeFi components, discusses associated risks, and proposes a risk-aware portfolio allocation methodology to enhance trust and efficiency in decentralized financial investments.

Contribution

It introduces a novel allocation methodology that integrates and quantifies DeFi investment risks, advancing risk management in decentralized finance.

Findings

Identified key risks in DeFi investments

Developed a risk quantification framework

Proposed a risk-aware portfolio allocation method

Abstract

Decentralized Finance (DeFi) is a new financial industry built on blockchain technologies. Decentralized financial services have consequently increased the ability to lend, borrow, and invest in decentralized investment vehicles, allowing investors to bypass third party intermediaries. DeFi's promise is to reduce the cost of transaction and management fees whilst increasing trust between agents of the Financial Industry 3.0. This paper provides an overview of the different components of DeFi, as well as the risks involved in investing through these new vehicles. We will also propose an allocation methodology which will integrate and quantify these risks.