cryptoassets: new algorithm shows that nested financial services could cause domino effects
Illustration shows how the proposed algorithm separates the financial services (DeFi protocols) for swapping the USDT to the KYL cryptoasset. The end-user interacts with the 1inch services, but the service uses internally with two Decentralized Exchanges (DEXs) and the wETH token, as an intermediary cryptoasset. Credit: Complexity Science Hub Vienna and TU Berlin

It has been an extremely turbulent year for the crypto world. In particular, the collapses of the stablecoin Terra at the beginning of the year and the one of the crypto exchange FTX two weeks ago left many investors stunned. New research from CSH Vienna shows how hypothetical cryptoasset failures could affect other financial services on Ethereum.

“After the collapse of the algorithmic stablecoin TerraUSD and its sister coin Luna earlier this year, other stablecoins have become the focus of attention. It is important to understand them, because they are an interface to the traditional financial sector and might propagate failures,” explains Bernhard Haslhofer, head of the Cryptofinance research group at the Complexity Science Hub Vienna (CSH Vienna).

Stablecoins are cryptocurrencies whose value is supposed to be bound to some other asset, like the US dollar. However, a series of coordinated speculative trades broke these ties, and TerraUSD as well as Luna were suddenly worthless.

Stablecoins are an essential building block

While analyzing several Decentralized Finance (DeFi) services, CSH researchers found that many rely on stablecoins like Tether. “Individual financial service providers use Tether in more than 14% of their executions, leading to a comparably high dependency on this particular asset,” says CSH researcher Stefan Kitzler. If Tether loses it’s value for whatever reason, many other DeFi services would be affected.

Besides this incident, 2022 experienced hacks, exploits, or collapses of crypto-related projects almost every month. With a record of around $760 million stolen in October, it’s not called Hacktober for no reason. “While the Bitcoin blockchain only enables the transfer of bitcoins between users, new blockchains such as Ethereum also allow for more complex financial operations such as lending or trading multiple cryptoassets that reflect assets outside the blockchain,” Kitzler says.

New algorithm unravels financial services on the Ethereum blockchain

For end users, the inner mechanisms of these financial services remain hidden and they are usually not aware of which other services are being used in the background.

Fortunately, CSH researchers have now unraveled the structure and building blocks of financial services on the Ethereum blockchain. They developed an algorithm that dissects these financial transactions and shows how the services are interwoven.

What they found were highly intertwined structures. “We are dealing here with complex financial products that are very difficult to understand and involve risks that are not yet fully understood,” says Kitzler.

Strong dependencies and unknown risks

The internal structure of these financial services can be imagined as a construct made up of several building blocks. “The upper building blocks depend on the lower ones. Because of this structure and the repeated use of certain blocks, the entire system is heavily dependent on very specific basic service blocks,” Kitzler says. If such a building block breaks away, it will affect other blocks building on it.

Decentralized Finance (DeFi) services—this entire complex of financial services related to crypto-assets—typically offer easy access through their websites, like e-banking offered by traditional banks. This low barrier to entry, or even gamification, has led to the popularity of DeFi and billions of dollars invested in the market.

Recent events in the crypto space and these research findings clearly show that cryptoassets are risky investments and that failures might affect financial services in the crypto and possibly also in the traditional financial world. “The first thing we need to do is create transparency and awareness. Users need to understand what exactly is behind a certain crypto financial service and what risks are involved,” says Kitzler.

“In light of recent events, it is clear that understanding potential systemic risks associated with cryptoassets and decentralized financial services must also become a top priority for regulators and policymakers,” concludes Bernhard Haslhofer.

The work is published in the journal ACM Transactions on the Web. More information: Stefan Kitzler et al, Disentangling Decentralized Finance (DeFi) Compositions, ACM Transactions on the Web (2022). DOI: 10.1145/3532857 Provided by Complexity Science Hub Vienna Citation: Cryptoassets: New algorithm shows that nested financial services could cause domino effects (2022, November 29) retrieved 29 November 2022 from https://techxplore.com/news/2022-11-cryptoassets-algorithm-financial-domino-effects.html This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.

TECH NEWS RELATED

TikTok EU ban on the table if social network doesn’t comply with new laws

TikTok is one of the most popular social networks out there. But TikTok is also a cause of concern for western governments that worry about the company’s ties to the Chinese government. TikTok can’t run on most devices the US government issues, and there has been talk of a ...

View more: TikTok EU ban on the table if social network doesn’t comply with new laws

Don’t Buy a Foldable Until Samsung Brings This Prototype to Life

Samsung Display via The Verge The world of foldable phones is surprisingly stagnant. The Galaxy Z Fold gets a tiny little upgrade every year, and rival phone brands loosely copy Samsung’s homework. But a new Samsung Display prototype called the “Flex In & Out” could turn this narrative on ...

View more: Don’t Buy a Foldable Until Samsung Brings This Prototype to Life

Best free sports streaming apps in 2023

Cutting the cord on cable television is something tons of people have done over the past five years. But that hasn’t proven to be the smartest way to continue to watch sports. Whether it comes from premium sports website subscriptions to keep tabs on your favorite players, or even fantasy ...

View more: Best free sports streaming apps in 2023

Avengers 5 might have Ant-Man in it, Quantumania star teases

The first MCU Phase 5 movie will be Ant-Man and the Wasp: Quantumania, the third installment in the Ant-Man franchise and a film with much higher stakes than the previous episodes. The sequel will deliver the MCU’s first Kang (Jonathan Majors) villain after we met a somewhat good He Who ...

View more: Avengers 5 might have Ant-Man in it, Quantumania star teases

Sharing a Netflix Account? Get Ready to Pay For It

DANIEL CONSTANTE/Shutterstock.com Netflix is about to get serious in its efforts to eliminate freeloaders. If you share a Netflix account with family or friends outside your household, get ready to pay for it. A new “paid sharing” system could roll out starting next month, and you’ll have to pay a ...

View more: Sharing a Netflix Account? Get Ready to Pay For It

‘7 Wonders’ Board Game Gets a New ‘Edifice’ Expansion

Asmodee and Repos Production Board game lovers have a wonderful reason to celebrate today. Board game makers Asmodee and Repos Production announced their latest collaboration: 7 Wonders Edifice, an expansion to the popular board game 7 Wonders. The game launches on February 24th for $29.99. 7 Wonders: Edifice adds ...

View more: ‘7 Wonders’ Board Game Gets a New ‘Edifice’ Expansion

T-Mobile Kicks Off 2023 With Another Data Breach

r.classen / Shutterstock.com In a press release, T-Mobile confirms that it detected a data breach in its systems on January 5th. A “bad actor” managed to steal personal information (but not financial data) from around 37 million customers. This is the eighth T-Mobile data breach since 2018. The hacker ...

View more: T-Mobile Kicks Off 2023 With Another Data Breach

Apple appeals to UK competition watchdog investigation about mobile browser dominance

Apple has filed an appeal against the UK’s competition watchdog regarding its dominance of mobile browsers in the cloud gaming market, reports Reuters. The Competition and Markets Authority started investigating this dominance by the Cupertino firm and Google. Lawyers representing Apple believe the investigation should be reviewed as CMA ...

View more: Apple appeals to UK competition watchdog investigation about mobile browser dominance

Galaxy S23 Ultra release date and specs leak finally reveals everything about the new model

WhatsApp for iOS rolling out the ability to create a chat with yourself

Amazon Prime Music Unlimited changes streaming prices, now matches Apple Music

Deadpool 3 and Secret Wars to feature Fox’s X-Men, according to Marvel insider

Report: OLED iPad Pro still on track for 2024 release, 2026 for MacBook Pro

How to negotiate over practically anything

HomePod 2 praised in exclusive hands-on before launch

M2 Pro MacBook Pro Amazon preorder deal gives you $50 off

What “choice” means for millions of women post-Roe

Singapore FinTech firm Pilon secures $5.2M seed funding led by Wavemaker Partners

Capital Square Partners and Basil Technology team up for $700M tech fund in Asia

This feel-good movie about man’s best friend is dominating Netflix

OTHER TECH NEWS

Top Car News Car News