Key Takeaways
What are the principal-agent problems in DeFi?
The potential for conflicts of interest for an individual (the principal) appointing others (agents) to carry out specific tasks is present throughout crypto and traditional economics. We focus on areas where DeFi presents unique conditions, such as the difficulty in establishing the full extent of a user's participation and the highly dynamic nature of economic variables.
Applications in Mechanism Design
Principal-agent problems are important in the design of both blockchains and DeFi protocols. We provide specific examples of how to define principals and agents and formalize their economic constraints in PoS blockchains, as well as AMMs and leverage protocols.
Open Questions and Conclusions
Many high-level questions in DeFi systems, such as general credibility (non-manipulability) conditions and capital efficiency constraints are still not fully explored. We conclude by noting how generalized principal-agent problems could help resolve some of these open questions.
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