/ DeFi, Publication, Working Paper

On DeFi and On-Chain CeFi: How (Not) to Regulate Decentralized Finance

Working Paper by Ann Sofie Cloots, Fabian Schär and Katrin Schuler

This paper proposes a framework to assess the factual decentralization of blockchain-based nancial infrastructure, commonly referred to as Decentralized Finance
(DeFi). It discusses various centralization vectors along the DeFi architecture layers from a technological and legal point of view. Distinguishing between endogenous and inherited
centralization, we demonstrate the importance of decentralization assessments for regulators. First, centralization vectors are a strong indication that a DeFi project may
have (some) custodial properties warranting regulation. Second, centralization vectors reveal the avenues of control in projects, pointing out appropriate regulatory hooks. The paper serves as an interdisciplinary introduction that analyzes blockchain-based nancial infrastructure and provides policymakers and regulators with a tool to identify the differences between truly independent, neutral infrastructure and fake decentralization. We conclude that the former may have very benecial properties and can contribute towards a more open and transparent nancial system, while the latter is a blockchain-based form of nancial intermediation and should be regulated as such.


  • Framework to assess DeFi projects for factual decentralization.
  • First paper combining technical analysis with legal perspective.
  • Differentiation between endogenous centralization and centralization inheritance.
  • Examples of common centralization vectors across DeFi stack that result in on-chain CeFi.
  • Legal considerations and challenges around common centralization vectors.