AN INTRODUCTION TO BLOCKCHAIN,
CRYPTOCURRENCY, AND
DECENTRALIZED FINANCE

Andreas Park

Agenda for the presentation

Answers and quick explainers to some questions - what is $\ldots$
- a cryptocurrency
- a blockchain
- Decentralized Finance
An Outlook:
- Some risks and what's coming over the next years.

What is a blockchain?

What is a cryptocurrency?

What is Decentralized Finance?

decentralized finance =
provision of financial services without the necessary involvement of a traditional financial intermediary

in practice: new financial infrastructure that will be a common resource

payments

stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

Application: decentralized trading

Application: Decentralized Lending

$\vdots$

borrowing and lending rates compounded per block

Smart Contract Derivatives with Synthetix

creations of Synths
- tokens linked to underlying price feed provided by a Chainlink Oracle
- long asset: sToken (sETH, sBTC)
- short asset: iToken (iMKR iAAV)

How does it work?

single collateral asset SNX $=$ utility token
you mint sTokens against SNX
you incur debt as proportion of total debt of system

Securities Creation: Tokensets

idea: create new mutual fund like asset

DeFi: an emerging ecosystem

dapp-linking, Defi-Legos and flash loans

Source: Harvey, Ramachandran, and Santoro (2020)

Does it matter economically?

Daily volume of decentralized trading commonly exceeds that of Coinbase (mcap: $52B)
Fees earned on DEX per day exceed several millions

Risks and open problems

many apps are still experimental, many kinks need ironing, and tech progress is needed
smart contract risk:
- detecting problems with code
- detecting problems with economic incentives
- foreseeing unforeseen contract contingencies
- contract contagion risks
governance of decentralized organizations
role of regulators

Blockchain tokens:
What type of tokens exist?

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!

tokens live on a single infrastructure and can interact with other tokens
tokens are immediately transferable
tokens can be used immediately in DeFi
token can be programmed to have many features

What's special about tokens?

What's the role of the regulator?

Application: Organization of UNISWAP

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

Regulators in the US

Securities and Exchange Commission
Commodities and Futures Trading Commission
Federal Reserve Bank
Office of the Comptroller of the Currency
FINRA
State regulators
FDIC
Congress (for laws)
The Executive (for executive orders)

Regulation in Canada

Provincial Securities Commissions:
- British Columbia Securities Commission
- Alberta Securities Commission
- Financial and Consumer Affairs Authority (Saskatchewan)
- Manitoba Securities Commission
- Ontario Securities Commission
- Autorite des marches financiers
- Financial and Consumer Services Commission (New Brunswick)
- Superintendent of Securities, Department of Justice and Public Safety, Prince Edward Island
- Nova Scotia Securities Commission
- Securities Commission of Newfoundland and Labrador
- Superintendent of Securities, Northwest Territories
- Superintendent of Securities, Yukon
- Superintendent of Securities, Nunavut
plus provincial ministries that oversee the commissions
Bank of Canada + Dept pf Finance
IIROC
FINTrac
OSFI
CDIC