# Monetary Policy, Digital Assets, and DeFi Activity

**Authors:** Antzelos Kyriazis, Iason Ofeidis, Georgios Palaiokrassas, Leandros Tassiulas  
**arXiv:** [2302.10252](https://arxiv.org/abs/2302.10252)  
**Date:** 2023-02-20  
**Summary page:** https://www.summarizepaper.com/en/paper/2302.10252v1/

## Key points

- The paper explores the impact of unexpected changes in US monetary policy on digital asset returns, with a focus on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem.
- Event study regressions are used to analyze the effects of monetary policy surprises on Bitcoin (BTC) and Ethereum (ETH), finding that such surprises negatively affect these two largest digital assets but do not significantly affect the rest of the market.
- FOMC statement releases strongly affect volatility of digital asset returns, while Minutes releases have a weaker effect.
- Borrowing interest rates in the Ethereum DeFi ecosystem are positively affected by unexpected changes in monetary policy, while debt outstanding and total value locked are negatively affected.
- The paper provides new insights into liquidation events by examining characteristics of liquidated investors and their liquidators.
- The study investigates how FOMC announcements influence activity in DeFi.
- Implications for investors and policymakers are discussed.

## Summary

This paper explores the impact of unexpected changes in US monetary policy on digital asset returns, with a focus on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The study uses event study regressions to analyze the effects of monetary policy surprises on Bitcoin (BTC) and Ethereum (ETH), finding that such surprises negatively affect these two largest digital assets but do not significantly affect the rest of the market. Additionally, high-frequency price data is used to examine how Federal Open Market Committee (FOMC) statements and Minutes releases affect prices of assets with higher collateral usage in DeFi. The study finds that FOMC statement releases strongly affect volatility of digital asset returns, while Minutes releases have a weaker effect. Furthermore, borrowing interest rates in the Ethereum DeFi ecosystem are positively affected by unexpected changes in monetary policy, while debt outstanding and total value locked are negatively affected. The paper also provides new insights into liquidation events by examining characteristics of liquidated investors and their liquidators. In addition, it examines how unexpected changes in federal funds rate affect DeFi borrowing rates, outstanding debt, and total value locked in the Ethereum network. Finally, the study investigates how FOMC announcements influence activity in DeFi. The background section provides an overview of blockchain technology, Bitcoin and Ethereum protocols, decentralized applications built on them, and decentralized finance. The paper concludes with implications for investors and policymakers. Overall, this paper contributes to existing literature by providing event-study regressions based on FOMC announcement days to estimate effects of unexpected changes in monetary policy on BTC, ETH, whole digital assets market as well as market without BTC and ETH; using high-frequency volatility analysis to show how FOMC statement release and Minutes release affect volatility of digital asset returns; providing new insights into liquidation events; examining effects of unexpected changes in federal funds rate on DeFi borrowing rates; investigating how FOMC announcements influence activity in DeFi; among others.