Decentralized Finance (DeFi) Accounting: Measurement and Reporting of
Transactions and Investments in Decentralized Financial Systems
Introduction
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
Decentralized finance (DeFi) refers to financial applications built using blockchain, smart
contracts, and open financial protocols to create transparent and permissionless financial
systems (Chen et al., 2021). Over the past few years, DeFi has grown rapidly with total value
locked exceeding $100 billion (DeFi Pulse, 2022). However, accounting for and reporting on
DeFi transactions and investments poses unique challenges due to their decentralized and
programmatic nature. This paper argues for the need to develop new accounting standards,
measurement approaches and reporting frameworks specific to DeFi in order to handle its
novel financial constructs appropriately.
The paper is structured as follows: First, key concepts in DeFi are briefly introduced. Second,
challenges in accounting for and valuing DeFi transactions using existing standards are
discussed. Third, new approaches proposed in literature for measuring and reporting various
DeFi activities are outlined. Fourth, elements of a principles-based DeFi accounting
framework are proposed incorporating some of these emerging practices. Finally, challenges
and recommendations for future development and standardization are presented.
Key Concepts in Decentralized Finance
Unlike traditional centralized finance, DeFi applications operate without intermediaries using
open financial protocols on distributed ledgers like Ethereum. Common constructs include
(Chen et al., 2021; DeFi Pulse, 2022):
- Decentralized exchanges facilitate peer-to-peer crypto trading without central authorities.
- Lending/borrowing protocols enable borrowing/lending digital assets with smart contracts
managing collateral and interest payments.
- Derivatives enable trading synthetic assets without counterparty risks through on-chain
settlement.
- Decentralized money markets automate lending/borrowing to produce market-based interest
rates.
- Decentralized insurance protocols provide risk covers through peer-to-peer
underwriting/claims without insurers.
- Decentralized asset management platforms enable trustless, autonomous asset management
using smart contracts.
- Stablecoins such as DAI aim to maintain price stability while retaining blockchain
attributes.
Challenges for Existing Accounting Standards
Existing accounting frameworks fail to fully capture key attributes of DeFi requiring new
deliberations (Chen et al., 2021; Vasin, 2020):
- DeFi constructs like liquidity pools have no legal owner but operate algorithmically,
challenging recognition concepts.
- Digital assets used have volatile valuations making fair value accounting problematic and
subject to manipulation.
- Smart contracts automate financial transactions autonomously which confounds
assumptions around intention and control.
- Transnational and non-corporate nature of most DeFi actors does not fit traditional
entity/organization based standards.
- Fungible tokens underlying DeFi may be security/commodity/currency simultaneously, with
none fitting exactly.
- Off-chain activities related to digital assets also require consideration for faithful
representation.
These attributes mandate rethinking concepts like asset/liability recognition, valuation,
revenue/expense timing for decentralized, trustless and disintermediated financial systems.
Emerging Measurement Approaches
Several approaches have emerged to address challenges in measuring various facets of DeFi:
For digital assets:
- Value digital assets held as intangible assets or inventories based on public chain data
(Vasin, 2020).
- Use market prices from centralized crypto exchanges considering price differences
(Huberman et al., 2019).
- Disclose fair value separately from carrying value due to volatility (Demeester et al., 2016).
For transactions:
- Recognize on-chain transactions settled via smart contracts as economic events (Chen et al.,
2021).
- Disclose transaction hash/block number for traceability and third party verification.
- Value transactions at settlement prices locked into smart contracts (Vasin, 2020).
For decentralized platforms:
- Value platforms as self-managed or autonomous digital infrastructures (Ivanova, 2021).
- Consider shares in liquidity pools or protocols as intangible protocol partnerships.
- Account for treasury funds held by protocols as assets under management (Kampstra et al.,
2021).
For off-chain activities:
- Extend reporting to cover promotion, developer activities if significant to platform (SEC,
2021)
- Disclose key risks from off-chain vulnerabilities and regulation.
Proposed DeFi Accounting Framework
Drawing from the aforementioned approaches, the key building blocks of a principles-based
DeFi accounting framework are proposed here:
Objective and Scope
The objective is fair representation of DeFi activities based on on-chain data considering
technological and regulatory constraints to facilitate informed decision making. Scope
includes both on-chain and qualifying off-chain activities impacting protocols.
Recognition Criteria
Economic events evidenced on public blockchains through verifiable transactions are
recognized. Decentralized platforms are recognized as self-managed infrastructure based on
degree of decentralization.
Valuation of Digital Assets
Digital assets are recorded at acquisition costs and adjusted to market/settlement prices at
each reporting date. Separate disclosure of carrying amount and fair value is prescribed due
to volatility.
Measurement of Transactions
On-chain transactions are measured based on locked-in settlement prices. Revenue/expense is
recognized point-in-time on confirmation rather than over time due to automatic settlement.
Presentation of Decentralized Platforms
Platforms providing core DeFi functions like exchanges, lending are presented as integral
parts. Protocol partnerships/shares in liquidity pools are shown separately.
Disclosures
Comprehensive disclosures on digital asset holdings, transaction volumes, market risks, off-
chain dependencies and regulatory uncertainties provide transparent representation.
The proposed framework adopts principles of technological neutrality, economic substance
over legal form and focusses on truth and fairness over rigid compliance. It aims to faithfully
capture activities in emergent decentralized financial systems.
Challenges and the Path Forward
While the proposed framework provides a starting point, several challenges remain in
realizing DeFi accounting standards:
Technological barriers: Reliance on public blockchains requires accounting knowledge of
cryptography, smart contracts which are still evolving fields.
Regulatory uncertainty: Unclear regulatory treatment of digital assets across jurisdictions
increases reporting risks and compliance burden.
Interpretability: Translating on-chain data precisely into financial statements without loss of
economic substance remains difficult.
Verifiability: Linking on-chain economic events definitively to off-chain entities like
developers challenges auditability.
Lack of history: Short history of DeFi constrains developing accounting precedents and long
term track records for protocols.
Overcoming these requires sustained research collaborations between accounting, technical
and regulatory communities. Pilot implementation of the proposed principles by early
adopters through discussion papers can refine concepts iteratively. International accounting
standard setters should actively engage to provide authoritative guidance. Colleges must
educate upcoming professionals on blockchain expertise. Only through such collaborative
progress can robust DeFi accounting standards be realized matching the dynamism of
decentralized finance itself.
