DECENTRALIZED FINANCE (DEFI) PROTOCOLS AND EMERGING ACCOUNTING CHALLENGES

The rapid expansion of Decentralized Finance (DeFi), characterized by its reliance on smart contracts, tokenization, and automated markets, presents a formidable challenge to traditional accounting frameworks. This paper frames DeFi's disruptive potential for conventional finance by highlighting its departure from centralized intermediaries and conventional custody models. It introduces key accounting issues, specifically focusing on the complexities of revenue recognition, asset measurement (including fair value considerations), and comprehensive disclosure in a decentralized ecosystem. Our methodology involves a critical literature analysis, drawing insights from existing accounting standards (IFRS and US GAAP), academic research, and official documentation from prominent DeFi protocols. We employ a logical framework development to synthesize these findings, complemented by illustrative case studies of Uniswap V3, Aave, and MakerDAO. The main insights reveal significant gaps in current guidance, leading to inconsistencies and ambiguities in financial reporting. We propose logical, literature-driven approaches for addressing these challenges, offering recommendations for standard-setters to foster greater clarity and comparability in DeFi accounting.