This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: With the rise in popularity of the digital assets known as cryptocurrencies over the last decade, the idea of a decentralized financial system that operates outside traditional markets is gaining mainstream appeal. A new analysis from a Penn State researcher, however, suggests that traditional and decentralized markets are more connected than they might seem.
Siddharth Bhambhwani, assistant clinical professor of accounting at Penn State's Smeal College of Business, compared borrowing and deposit rates from Aave, a popular decentralized finance platform that offers peer-to-peer cryptocurrency lending, to U.S. Treasury yields between January 2023 and March 2026. He found that Treasury yields significantly influence rates in cryptocurrency lending markets, despite the fact that there is no direct link between the two markets.
Bhambhwani published his findings in the journal Finance Research Letters. In the following Q&A, Bhambhwani explained how decentralized finance lending typically operates and how the connection to traditional financial systems might shape investors' perceptions of this growing market. Decentralized finance, or DeFi, allows people to borrow and lend digital assets without going through a traditional financial institution such as a bank.
Instead, transactions are handled through computer programs called "smart contracts" that operate on a blockchain, which is a shared ledger that many computers maintain at once, with no single owner. A simple way to think about it is as a marketplace with pools of digital assets. Some users deposit assets into those pools and earn interest, while other users borrow from the pools and pay interest.
Unlike a conventional bank loan, though, DeFi borrowing generally requires borrowers to put up cryptocurrency worth more than the amount they borrow as collateral. To borrow $80, we might have to lock up $100 of another asset. If our collateral falls close to the borrowed amount plus accrued interest, the software sells it automatically and repays the loan.
One attraction is accessibility. A DeFi program, known as a protocol, generally does not evaluate a borrower's credit score, income or employment history in the way a bank might. If a user has the necessary digital assets and meets the protocol's collateral requirements, the transaction can occur automatically.
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