DeFi Collateral-Based Loans and Digital Markets in Web3 Platforms

Principal Investigator: Prof. Nicola Dimitri – University of Siena
Duration: 1 year

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Project Overview

The project investigates the economic foundations of collateral within decentralised finance (DeFi) lending protocols and examines its broader implications for Web3 digital markets. It focuses on liquidity provision mechanisms, overcollateralisation requirements, and the distinctive ways in which blockchain-based lending systems diverge from conventional financial intermediation models. The research seeks to understand the economic logic underpinning these novel financial architectures.

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Objectives

The research will analyse the economic role and dynamics of collateral within leading DeFi platforms such as Aave and Compound, examining how these mechanisms function in practice. It will develop a rigorous theoretical model that explores the relationships between price volatility, interest rate determination, and overcollateralisation thresholds in decentralised lending markets. The project will study hypothetical scenarios in which collateral could be reused or rehypothecated by liquidity providers to enhance capital efficiency, drawing relevant analogies with fractional-reserve banking systems. Finally, it will identify and assess how Web3 technologies may fundamentally redefine the structure of digital markets and the underlying economics of platform-based ecosystems.

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Ecosystem Development

This project strengthens the DeFi ecosystem by providing rigorous economic analysis that informs more robust protocol design and risk management practices. The theoretical models will enable better prediction of systemic risks, potentially preventing cascading liquidations during market volatility. The exploration of collateral reuse mechanisms could unlock significant improvements in capital efficiency, whilst the examination of Web3's impact on digital markets will provide valuable insights for policymakers, facilitating constructive dialogue between the DeFi community and regulatory authorities.

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Expected Outcomes

The project will produce a rigorous academic analysis that clarifies the conditions under which collateral mechanisms can sustain stability and efficiency in DeFi lending markets. It will also provide valuable insights for policymakers, platform designers, and researchers regarding questions of efficiency, systemic risk, and the potential for innovation in Web3-based financial markets.

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