Monetary Policy, Digital Assets, and DeFi Activity

TL;DR

This study examines how unexpected US monetary policy changes impact digital asset returns, DeFi activity, and market volatility, revealing significant effects on Bitcoin, Ethereum, and DeFi borrowing rates post-policy surprises.

Contribution

It provides new empirical evidence on the influence of monetary policy surprises on digital assets and DeFi activity using high-frequency data and blockchain analysis.

Findings

Monetary surprises negatively affect BTC and ETH returns.

FOMC statement releases increase digital asset volatility, especially after 2021.

DeFi borrowing interest rates respond positively to policy surprises.

Abstract

This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.