Andreas Park

MFIN 2021

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


stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

Application: decentralized trading

Application: Decentralized Lending


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 

dapp-linking, Defi-Legos and flash loans

Source: Harvey, Ramachandran, and Santoro (2020)

Does it matter economically?

Coinbase (Centralized Crypto Venue) Financials

Application: decentralized trading

  • 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

Where is the regulator?

Crypto Wash Trading, Lin William Cong, Xi Li, Ke Tang, Yang Yang

  • unregulated exchanges: rampant manipulations
  • 70% of reported volume fake & temporarily distort prices

Volume Manipulation

Cryptocurrency Pump-and-Dump Schemes
Tao Li, Donghwa Shin, and Baolian Wang, 2020

What is pump and dump?

arranged via Telegram Channels



Journal of Finance 2020

Flow of events

  • Tether is authorized
  • moved to Bitfinex 
  • then slowly distributed to other Tether-based exchanges (Poloniex and Bittrex)
  • \(\to\) almost no Tether returns to the Tether issuer to be redeemed
  • Kraken (major exchange for Tether\(\to\) USD) accounts for only a small proportion of transactions

Figure 1. Aggregate Flow of Tether between Major Addresses

Price Manipulations with Fake Money

the 1% of hours with the strongest lagged Tether flow are associated with 58.8% of the Bitcoin buy-and-hold return over the period.

Is the Price Effect Economically Important?

the "normal-times" returns

August 2016

Centralized exchanges are a security risk

Centralized exchanges are a security risk: regulatory action

Regulatory predictions

  1. Centralized exchanges regulation (OSC has started harassing them)
  2. Stablecoins
  3. Ontario's new Capital Markets Act draft proposes that Chief Regulator can designate any crypto asset a security

What lies ahead?


= amalgamation of the digital and physical world ("phygital")

The bigger picture: Facebook wants to own the "Metaverse"

CBDCs are on their way


Will Tiff get us a Digital Loonie?

The Bank of Canada's Contingency Plan (Feb 2020):
Consider Issuing CBDL if:

  • Cash becomes unusable, and/or
  • An alternative digital money starts taking over

Should he?

Yes: Veneris, Park, Long, Puri (2021)

Can he?

  • banks have to work harder to get deposits
  • bank margins will decline
  • instability or economic harm unlikely 


What's Next?


  • regulatory action
  • FIs to provide some services
  • continued evolution
  • major disruption
  • DefFi => Diem 
  • new finance brands
  • "CBDC as service"
  • few "real" CBDCs 


Blockchain and Decentralized Finance Primer for MFIN

By Andreas Park

Blockchain and Decentralized Finance Primer for MFIN

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