"Efficiency in DeFi Lending : Interest Rate Mechanisms and Liquid Staking"
joint work with Franck Gabriel)

Abstract : Liquid staking, a notable recent innovation in decentralized finance (DeFi) allows to delegate and redeploy capital which was traditionally locked and has thus been promoted for its “capital efficiency” virtues. In the context of DeFi lending, we build a tractable general equilibrium model to analyze two strategic interactions between investors, which, we show, affect the performance of liquid vs traditional staking. We find that without a proper adjustment of the DeFi lending interest rate mechanism, liquid staking can worsen efficiency even when there are no delegation costs. When the interest rate is optimally set, a combination of mild delegation costs and limited investor competition can lead to the same conclusion.