Intro Lecture Blockchain and DeFi 2025-26

What is a blockchain and why should you care?

Instructor:           Andreas Park
 

 

Some Technological Innovations throughout History

technological innovation removes barriers:

  • what can be done
  • how much can be done
  • by whom it can be done

many innovations move power to do things from selected few to the masses

=> "decentralization" (loosely)

tech disrupts a group of people who built a living around a technological restriction and they disrupt government power exerted via these groups

Some examples

  • Phonenician alphabet (1050 BCE)
  • Coined money (630 BCE)
  • crossbows (ban proposed in 1139)
  • Lutheran/King James bible (1517)
  • printing press (1455)
  • individual transportation: bicycle (1880s), cars 1885/1908 (Model T)
  • personal computers (1970s)
  • internet (1980s-90s)

fundamentally change established networks, intermediaries, and value extraction processes

What problem does Satoshi want to solve?

  • backdrop: 2008 Great Financial Crisis when the collapse of global banks threatened the collective well-being
  • peer to peer transfers of digital value
  • no need for an intermediary

Traditional Finance vs Decentralized Finance: the 30,000 ft perspective

Institutional Arrangements in Traditional Finance

deposit money in a bank

hold cash directly

hold assets with a brokerage

Institutional Arrangements in Traditional Finance

hold cash directly

Key Features

  • allows peer to peer payments
  • provides immediacy
  • counterparty may worry about authenticity of assets
  • safekeeping of funds (theft, robbery, etc)
  • new: restrictions on usage

This "physical world" arrangement is NOT what we are interested in!

Institutional Arrangements in Traditional Finance

deposit money in a bank

Key Features

  • bank provides
    • payment services/access to financial infrastructure for a fee 
    • authenticity of assets
    • safekeeping
  • possible concerns
    • formally lender to the bank \(\Rightarrow\) depend on soundness of bank lending
    • possibility of censure and access restrictions

Institutional Arrangements in Traditional Finance

hold assets with a brokerage

Key Features

  • broker-dealer provides
    • custodial services
    • authenticity of assets
    • safekeeping
    • access to trading infrastructure
  • possible concerns
    • possible conflicts on interest
    • possibility of censure and access restrictions

Institutional Arrangements in Traditional Finance

Big Picture Insight

  • traditional finance relies on intermediaries
  • arrange for access to infrastructure
  • ultimately control assets but guarantee authenticity and safekeeping

Institutional Arrangements in Decentralized Finance

all assets are held in "crypto wallets"

self-custody (owner controls the wallet)

external custody (third party controls the wallet)

Institutional Arrangements in Decentralized Finance

all assets are held in "crypto wallets"

external custody (third party controls the wallet)

Key Features

  • usually a crypto-trading platform that offers "internal" services on its platform 
    • safekeeping
    • access to internal trading infrastructure
    • link to payments from traditional finance
  • possible concerns
    • possible conflicts on interest
    • soundness of platform
    • possibility of censure and access restrictions

Institutional Arrangements in Decentralized Finance

all assets are held in "crypto wallets"

self-custody (owner controls the wallet)

Key Features

  • user controls assets
    • has direct access to infrastructure and applications
    • cannot be censored, faces no access restrictions, and no limits for activities
  • is responsible for safe-keeping of wallet

This arrangement is the focus of "decentralized finance"!

Institutional Arrangements in Decentralized Finance

Key Insight

  • blockchain/decentralized finance gives users the option to control assets themselves
  • there is no need for financial intermediaries
  • but there is a role for intermediaries

What is a Blockchain?

  • a data structure
  • with an underlying protocol that allows the trustless and definitive transfer of a digital item of value
  • on a technical level, a blockchain protocol must solve the "double-spend" problem
  • this requires three components

transactions cannot be faked \(\Rightarrow\) cryptography/digital signatures

the past cannot be altered
\(\Rightarrow\) hash-linking of past transaction records

the past cannot be made to disappear
\(\Rightarrow\) process of how new blocks are added

Summary of how Satoshi solved the problem

  • decentralized/distributed database  \(\to\) no single controlling entity, available to anyone
  • cryptographically secured signature \(\to\) transactions can't be faked
  • hash-linked data structure \(\to\) cannot change/make disappear past transactions
  • proof-of-work consensus \(\to\) cannot make blocks disappear without re-doing the work
  • \(\Rightarrow\) solves double-spend problem

What is a Cryptocurrency?

  • fees are earned by ETH "stakers"
    • there is a return on ETH
    • if people are willing to use ETH, there is value to ETH
    • back-of-the-envelope: \[\text{return on investment}=\frac{\text{fee income}}{\text{staked ETH}}=\frac{365\times 10M}{90B}=4\%\]

Conceptually, what is a blockchain?

What our financial infrastructure looks like

payments

stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

payments

stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

\(\Rightarrow\) a single common resource

  • easy value management
  • straightforward transfers & ownership accounting
  • new types of contracts and usage of assets
  • \(\ldots\)

What would the most efficient financial infrastructure look like?

How do you own a blockchain asset? Addresses, Accounts, Wallets, and Public/Private Keys

Smart contract accounts

  • controlled by code
  • decentralized applications
  • tokens

Externally owned accounts

controlled by private keys

private
key

public
key

seed phrase

public
address

wallet = software to keep and use private keys

  1. Self-custody of assets
  2. Access to financial infrastructure
  3. Conceptually non-custodial services
  4. Value management layer = common resource
  5. Platform approach to commerce

Summary: What makes blockchain-based finance different from TradFi?

{

{

features

consequences

What is "Crypto"?

History of Crypto and Blockchain how I'd like you to see it

single-purpose digital money

general purpose platform

DeFi applications

alternative digital money

alternative smart contract platforms

scaling solutions and higher level (d)apps

money applications

An Alternative View of Blockchain

crazy internet money with no value

a vehicle to create unlimited crazy internet money

utility
tokens

DAOs

NFTs

Meme

other crazy
 money

alternative vehicles for vaporware

?

 = Meme Coins!

p'nut

DogWIFHat

The Bottom Line: Crypto is ...

  1. A crazy world of vaporware, gambling, scams, fraud, rug-pulls, money laundering, Bitcoin-crazy nutters, Fartcoin, Hawk-Tuah Tokens
     
  2. A serious attempt to make finance better, more efficient and remove frictions, more competitive, cheaper, faster

End of Intro

 

 

 

Intro Lecture 2025-26

By Andreas Park

Intro Lecture 2025-26

This lecture introduces the fundamental concepts of decentralization versus centralization and the implications for financial intermediation. It explains how a blockchain functions as a hash-linked database that records a full series of transactions. Participants will learn about key concepts, including immutability, distributed networks, and how decentralization can eliminate traditional intermediaries. It also introduces smart contracts, defining their capabilities, limitations, and use cases in decentralized applications.

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