SoK: Decentralized Finance (DeFi) -- Fundamentals, Taxonomy and Risks

TL;DR

This paper systematically categorizes DeFi protocols, analyzes their design and associated risks, and provides a structured methodology to understand the complex landscape of decentralized financial services beyond cryptocurrencies.

Contribution

It introduces a comprehensive classification framework for DeFi protocols and offers detailed risk analysis based on protocol design and usage patterns.

Findings

Over 90% of TVL in DeFi covered by major protocol categories

Protocols classified into liquidity pools, pegged tokens, and aggregators

Risk exposure depends on protocol design and token usage

Abstract

Decentralized Finance (DeFi) refers to financial services that are not necessarily related to crypto-currencies. By employing blockchain for security and integrity, DeFi creates new possibilities that attract retail and institution users, including central banks. Given its novel applications and sophisticated designs, the distinction between DeFi services and understanding the risk involved is often complex. This work systematically presents the major categories of DeFi protocols that cover over 90\% of total value locked (TVL) in DeFi. It establishes a structured methodology to differentiate between DeFi protocols based on their design and architecture. Every DeFi protocol is classified into one of three groups: liquidity pools, pegged and synthetic tokens, and aggregator protocols, followed by risk analysis. In particular, we classify stablecoins, liquid staking tokens, and bridged (wrapped) assets as pegged tokens resembling similar risks. The full risk exposure of DeFi users is derived not only from the DeFi protocol design but also from how it is used and with which tokens.