Blockchain & FinTech 101

Blockchain in 2022 and beyond
A Primer

Presenter: Andreas Park

Agenda

Background:
- Vocabulary & Evolution
- What's DeFi and what's different to TradFi?
- What do we know about tokens?
What happened with FTX & Terra?
Outlook

The Premise of the
Internet & Blockchain

Peer to Peer Communication

Peer to Peer Value

!

?

Sidebar: What is digitize-able value?

money
digitally native assets
claims on resources and property
identity, personal data

The challenge: how do you ensure digital scarcity?

traditional approach: unique record-keeper
problem:
- intermediary necessary for record keeping
- tight supervision of custodian
- no peer-to-peer
What is the equivalent of TCP/IP for value?

What is a Blockchain?

What is a Cryptocurrency?

a blockchain is not a thing, it is a protocol $=$ an idea and an approach
it is not going to be uninvented

Why is this idea powerful?

blockchain = a protocol that creates a common resource for value management

payments

stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

create & manage assets
transfer value
contingent contracts
guaranteed execution of sets of commands
applications

What makes DeFi different from TradFi

decentralized finance =
provision of financial service functionality without the necessary involvement of a traditional financial intermediary like a bank or broker-dealer

digital media =
provision of information service functionality without the necessary involvement of a traditional information intermediary like a publisher, library, or newagency

trading Infrastructure

payments network

Stock Exchange

Clearing House

custodian

beneficial ownership record

seller

buyer

Broker

Blockchain Infrastructure

seller

buyer

Application: decentralized trading with automated market makers

New institutions!

passive "shared" liquidity provision
new pricing function

Dapp composability & Flash loans

1. flash-borrow DAI

5. repay DAI

3. receive ETH

4. convert ETH to DAI

2. liquidate ETH loan with DAI

Loan liquidation opportunity

Examples of research questions in the literature

system risk from liquidations
contagion risk
price impact from liquidations

Securities Creation: Tokensets

idea: create new mutual fund like asset

Philosophy of Peer-to-peer

Traditional Market
two-sided with fixed roles

consumers $\leftrightarrow$ producers
consumers $\leftrightarrow$ intermediaries $\leftrightarrow$ producers

Decentralized Market?
value management protocol $\not=$ market

blockchain $=$ application execution $=$ intermediary
blockchain-native $\Rightarrow$ requires platform thinking
consumers $=$ producers

Peer-to-peer $\Rightarrow$ Platforms

liquidity $\nearrow$

volume $\nearrow$

protocol fees $\nearrow$

token value $\nearrow$

Platform economics is tricky:

What's the product?
How do you get it started?
How do you get people to contribute?
How do you earn money?

Who controls the Projects? Decentralized Autonomous organizations

UniSwap Lab supports development

a website app accesses the code

token holders control contact features

don't own the code

operation = decentral

control = decentral

anyone can use the baseline code

core code runs on the blockchain

tokens used as rewards

A Taxonomy of Tokens

tokens are a re-imagination of value, ownership, use, rewards
tokens live on a single infrastructure and can interact with other tokens
tokens are immediately transferable & immediately usable in DeFi
token can be programmed to have many features and have many different uses

tokens can assign ownership to "things" that could not be owned before

What's a crypto-token and what's special about it?

a blockchain is a protocol in which
- users have direct control and responsibility over their assets
- users can create codes at will
- $\rightarrow$ any user can create tokens and applications

Tokens by use

payments:

you use them strictly to pay for something
example: native cryptocurrencies

utility

you use them to access a specific service of function
example: filecoin

stablecoins

digital representation of fiat money
centralized/ decentralized
examples: DAI, USDC, USDT

governance

voting rights to determine parameters of a project
example: UNI, Compound etc

asset

representation of ownership
pool claims, digital items
example: receipts from UniSwap, Compound, NFTs

derivatives

tokens based on other tokens & functions
Example: tokensets

Disclaimer: this list in non-exhaustive, new ideas and concepts come up every day!

- End of Theory -

An ugly 9 months

From a slow slide to a thorough crash

-75%

!

The Terra Implosion

UST Stablecoin

LUNA (cryptocurrency of the TERRA network)

A timeline

May 7: selling pressure on UST from Curve withdrawals

May 12: LUNA and UST at $0.01

June 27: Three Arrows Capital ordered to liquidate

June 12: Celsius Network suspends withdrawals

July 13: Celsius files for Chapter 11

July 6: Voyager Digital files for Chapter 11

July 4: Vault suspends withdrawals

Three Arrows Capital lost >60% of value and faces numerous margin calls that they did not react to

\}

partially "saved" by $\ldots$ FTX

The FTX Implosion

A timeline

Nov 8

Recurring Core problem QuadrigaCX:

QuadrigaCX:
- Gerry Cotton sold people crypto he did not have
FTX:
- auto-execution of margin calls for all except Alameda
- SBF used customer funds to hide "short" market maker Alameda

Fundamental Problems: Solution sans Regulators?

IN FINANCE TERMS

hedge = off-setting position
here: unhedged/"leverage"

Solution

prove aggregate positions
prove assets & liabilities
asset = liabilities $\Rightarrow$ solvency

New trend: data providers check assets

Assets: cash in bank accounts and crypto assets in exchange wallets
Liabilities: customers' crypto and cash deposits

Proof of crypto assets
- publish all exchange wallets
- proof of control: shift assets from one address to another at a pre-determined time

Proof of crypto liabilities
- public customer balances - customer can check
  - own holding
  - sum of all
Problem: privacy (adequate solutions exist)

Proof of Assets & Liabilities

A timeline

May 7: selling pressure on UST from Curve withdrawals

May 12: LUNA and UST at $0.01

June 27: Three Arrows Capital ordered to liquidate

June 12: Celsius Network suspends withdrawals

July 13: Celsius files for Chapter 11

July 6: Voyager Digital files for Chapter 11

July 4: Vault suspends withdrawals

Three Arrows Capital lost >60% of value and faces numerous margin calls that they did not react to

\}

partially "saved" by $\ldots$ FTX

all centralized!

Centralized vs Decentralized?

Path forward

blockchain as an idea will not become uninvented
there is continuous research & development, including by universities
when another hype starts, people will want to get their hands on the assets
blockchains are borderless by design

"tough" regulation pushes firms outside of jurisdictions
no regulation can prevent the bankruptcy of an offshore entity
jurisdictional battles among regulators have to end
willing issuers need clear guidance

Summary and Outlook

Three Scenarios for the Next Five Years

borderless digital economy $\to$ blockchain-integrated

blockchains $\to$ stay niche (gaming)

mass tokenizations $\to$ likely originates from non-Western world