The goal of this project is to develop a causality-based framework for the analysis of decentralised finance (DeFi), based on the principled approach of actual causality [1] and responsibility [2], the latter pioneered by Dr Chockler. The framework will assist in governance of DeFi, as well as building and maintaining DeFi portfolios.
Decentralised finance (DeFi) is touted as a new form of intermediation in crypto markets. The key elements of this ecosystem are novel automated protocols on blockchains – to support trading, lending and investment of cryptoassets – and stablecoins that facilitate fund transfers. There is a “decentralisation illusion” in DeFi since the need for governance makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power. If DeFi were to become widespread, its vulnerabilities might undermine financial stability. These can be severe because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers such as banks. Existing governance mechanisms in DeFi would provide natural reference points for authorities in addressing issues related to financial stability, investor protection and illicit activities. DeFi’s vulnerabilities are severe because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock-absorbing capacity. [4]
Dr Chockler pioneered the use of actual causality in a number of applications, including verification [3], neural networks, and reinforcement learning. In this project, the student will start a new direction, as no causal analysis of DeFi exists yet. Furthermore, as Dr Chockler is also one of the leading researchers in formal verification, we aim to apply the causal framework to address the DeFi vulnerabilities and verify the system.
[1] J.Y. Halpern and Y. Pearl: Causes and Explanations: A Structural Model Approach. Part I: Causes. The British Journal on the Philosophy of Science, 2005.
[2] H. Chockler and J.Y. Halpern: Responsibility and Blame: A Structural-Model Approach. JAIR 2004.
[3] I. Beer, S. Ben-David, H. Chockler, A. Orni, R. J. Trefler:
Explaining counterexamples using causality. Formal Methods Syst. Des. 40(1): 20-40 (2012).
[4] DeFi risks and the decentralisation illusion by Wenqian Huang and Andreas Schrimpf