Disentangling Decentralized Finance (DeFi) Compositions

We present the first study on compositions of Decentralized Finance (DeFi) protocols, which aim to disrupt traditional finance and offer financial services on top of the distributed ledgers, such as the Ethereum. Starting from a ground-truth of 23 DeFi protocols and 10,663,881 associated accounts, we study the interactions of DeFi protocols and associated smart contracts from a macroscopic perspective. We find that DEX and lending protocols have a high degree centrality, that interactions among protocols primarily occur in a strongly connected component, and that known community detection cannot disentangle DeFi protocols. Therefore, we propose an algorithm for extracting the building blocks and uncovering the compositions of DeFi protocols. We apply the algorithm and conduct an empirical analysis finding that swaps are the most frequent building blocks and that DeFi aggregation protocols utilize functions of many other DeFi protocols. Overall, our results and methods contribute to a better understanding of a new family of financial products and could play an essential role in assessing systemic risks if DeFi continues to proliferate.