EVALUATING THE FINANCIAL VIABILITY OF DECENTRALIZED FINANCE PLATFORMS: RISKS, RETURNS, AND REGULATORY GAPS

Aurangzeb Khan; Nasrullah Khan; Muzzammil Siraj

Authors

Aurangzeb Khan Author
Nasrullah Khan Author
Muzzammil Siraj Author

Keywords:

Decentralized Finance (DeFi), Financial Viability, Risks, Returns, Regulatory Gaps, Pakistan Financial Firms.

Abstract

The rapid growth of Decentralized Finance (DeFi) has transformed the financial landscape globally, offering innovative investment opportunities while posing unique risks and regulatory challenges. This study evaluates the financial viability of DeFi platforms in the context of Pakistani financial firms, focusing on the effects of DeFi risks and DeFi returns, and examining the moderating role of regulatory gaps. Guided by the Risk–Return Trade-Off Theory, the research employs secondary data from 65 financial firms listed on the Pakistan Stock Exchange (PSX) over the period 2018–2023. Data were collected from annual reports, DeFi platform performance summaries, SBP and SECP circulars, and World Bank fintech reports.

Descriptive statistics revealed moderate to high-risk exposure, moderate returns, and notable regulatory gaps in Pakistan’s DeFi ecosystem. Correlation and multicollinearity analyses confirmed the suitability of the dataset for regression analysis. The results indicate that DeFi risks significantly reduce financial viability, while DeFi returns positively influence it, affirming the expected direct effects. Moderation analysis shows that regulatory gaps exacerbate the negative impact of risks and weaken the positive effect of returns, emphasizing the critical role of regulatory oversight. Control variables revealed that firm size positively affects financial viability, whereas firm age is not significant.

This study contributes to theory by extending the Risk–Return Trade-Off Theory to the emerging domain of DeFi in a developing country context and highlights the interplay between risk, return, and regulation. Practically, the findings offer guidance to financial firms, regulators, and investors on risk management, investment strategies, and policy formulation to ensure sustainable engagement in DeFi platforms. Overall, the research underscores that balancing risks, returns, and regulatory frameworks is crucial for financial sustainability in Pakistan’s decentralized finance ecosystem.