Decentralized financial applications (DeFi) are a new breed of consumer-facing financial applications composed as smart contracts, deployed on permissionless blockchain technologies. In this article, we situate the DeFi concept in the theoretical context of permissionless blockchain technology and provide a taxonomical overview of agents, incentives and risks. We examine the key market categories and use-cases for DeFi applications today and identify four key risk groups for potential stakeholders contemplating the advantages of decentralized financial applications. We contribute novel insights into a rapidly emerging field, with far-reaching implications for the financial services.

The smart contract-based markets for non-fungible tokens (NFTs) on the Ethereum blockchain have seen tremendous growth in 2021, with trading volumes peaking at $3.5b in September 2021. This dramatic surge has led to industry observers questioning the authenticity of on-chain volumes, given the absence of identity requirements and the ease with which agents can control multiple addresses. We examine potentially illicit trading patterns in the NFT markets from January 2018 to mid-November 2021, gathering data from the 52 largest collections by volume. Our findings indicate that within our sample 3.93% of addresses, processing a total of 2.04% of sale transactions, trigger suspicions of market abuse. Flagged transactions contaminate nearly all collections and may have inflated the authentic trading volumes by as much as $149,5m for the period. Most flagged transaction patterns alternate between a few addresses, indicating a predisposition for manual trading. We submit that the results presented here may serve as a viable lower bound estimate for NFT wash trading on Ethereum. Even so, we argue that wash trading may be less common than what industry observers have previously estimated. We contribute to the emerging discourse on the identification and deterrence of market abuse in the cryptocurrency markets.

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