Decentralised Finance and Cryptocurrency: Exploring Market, Risks, and the Drivers of a Transforming Financial Landscape

Abstract

This thesis examines the interconnections between decentralised finance (DeFi), traditional banking systems, and macroeconomic forces, and evaluates their implications for financial stability and portfolio management. The rapid expansion of DeFi and its increasing interaction with established financial markets raise important questions regarding systemic risk transmission and the sensitivity of decentralised assets to macroeconomic conditions. The study adopts a three-part structure. First, a systematic literature review synthesises existing research on cryptocurrency and DeFi markets, identifying behavioural, institutional, and methodological gaps that motivate the empirical analysis. Second, the thesis investigates the interconnectedness between DeFi tokens and international banking indices using a time-varying parameter vector autoregressive framework. The results indicate substantial and evolving spillover effects between decentralised and traditional markets, with banking indices generally acting as net transmitters of shocks and DeFi assets frequently operating as net receivers, particularly during periods of elevated global uncertainty. Third, the analysis evaluates the impact of key macroeconomic variables, including interest rates, inflation, and market volatility, on DeFi markets in comparison with traditional cryptocurrencies. The findings suggest that DeFi assets exhibit considerable sensitivity to macroeconomic shocks, while certain stable assets display relatively greater resilience. The portfolio analysis suggests that DeFi assets may provide diversification benefits under stable market conditions; however, these benefits weaken during periods of stress, reflecting the evolving integration of decentralised and traditional financial systems. Overall, the thesis demonstrates that DeFi occupies an intermediary position within the financial ecosystem: it is neither fully detached from nor fully integrated with traditional finance. These findings contribute to the understanding of financial interconnectedness in decentralised markets and offer insights for investors and policymakers concerned with innovation, risk management, and financial stability.