What is DeFi? Overview of Topics

 

Presenter:           Andreas Park
 

 

Decentralized Trading

Trading Infrastructure

payments network

Stock Exchange

Clearing House

custodian

custodian

 beneficial ownership record

seller

buyer

Broker

Broker

Application: decentralized trading with automated market makers

Source of savings: 

  • better risk sharing among liquidity providers
  • better use of capital

Possible transaction cost savings when applied to equity trading: \(\approx\) 30%

Source: "Learning from DeFi: Would Automated Market Makers Improve Equity Trading?" working paper, Malinova & Park 2023

Decentralized Lending

borrow

provide collateral

Application: Pool-based borrowing and lending

Automated Investment Strategies

Obvious Smart Contract Application: Automate Investment  Strategies

idea: create new mutual fund like asset 

"yield aggregator:" push capital where rate of return is highest

Tokenomics

  • People clearly treat tokens and cryptocurrencies as objects of speculation
  • data: authors calculations from TAQ (up to March 2023)
  • crypto volume worldwide is larger by factor >4

What roles do tokens play?

\(\to\) key feature: no necessary intermediaries

  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

{

{

features

consequences

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?

Without intermediaries:
platform economics!

incentives for both?

Application 1: decentralized trading with automated market makers

Problems:

  • How to get liquidity?
  • How do you attract traders?

lesser problem because

  • tokens trade elsewhere
  • arbitrage creates activity

Common solution: create a reward token! Here's how this works

Step 4: users receive a reward token based on the time that they lock up the "receipt" token

Step 3: users lock up the "receipt" token in a smart contract

Step 2: users contribute liquidity and get a "receipt" token

Step 1: create reward tokens and deposit into a smart contract

borrow

provide collateral

Application: Pool-based borrowing and lending

Application 2: decentralized Borrowing and Lending

Same problems as with trading:

  • How to get liquidity?
  • How do you attract borrowers?

But: in contrast to trading, here you need both!

Asset Tokenization or
"The Creation of Asset-Linked Tokens"

July 31, 2025: "today I am announcing the launch of “Project Crypto”—a Commission-wide initiative to modernize the securities rules and regulations to enable America’s financial markets to move on-chain."

Tokenization is coming

  • this list contains mostly "neglected" assets
  • report published in 2024
  • what about very "busy" assets aka equities
    • what challenges apply to tokenization?
    • what problem are you trying to solve vis-a-vis traditional markets?
    • what do we have to worry about with a defi implementation?
    • what are the opportunities?

Stablecoins

digital representation of a unit of a fiat currency on a blockchain

pulled from Nick Carter's talk on "Will stablecoins serve or subvert U.S. interests?"

Central Bank-Issued Digital Currencies

Evolution

2008

2014/5

2019

2020 (announced)

2025 (framework

Challenges

Source: Cambridge Bitcoin Energy Consumption Index https://cbeci.org/

Challenge 1: Energy Consumption

Ethereum Challenge 1: Environment

  • Carbon footprint of Switzerland
  • Power consumption of Austria

problem solved

Ethereum Challenge 2: Throughput

Source: Etherscan w re-scaling

Ethereum Throughput Solution: L2s/Rollups

Ethereum Challenge 3: State Size

Source: Ycharts

Money Laundering and Crime

  1. Does it provide scale?
  2. Does it enable new criminal activity?
  3. Is there substitution from super-visable means? Is it easier and safer to use for criminals than traditional means?

What's special about crypto-crime?

Chainalysis Crime Report

extra info:

  • 2019:  PlusToken Ponzi scheme 
  • numbers depend on known addresses, e.g., 2021 report listed ~.3% for 2020 and upped to .65 now

Final Thoughts

Some Final Thoughts

  • this presentation only scratches at the surface, there are tens of thousands of people working on blockchain ideas
     
  • this is not (only) garage band work -- university research plays a key role
     
  • blockchain tech won't get uninvented.
     
  • the space is still trying to figure things out, including tech and economic challenges
     
  • great progress has been made, but things will and do still go wrong
     
  • a common resource can have huge economic benefits
     
  • I'd like to see more thinking and discussion about paths to unlock the benefits

@financeUTM

andreas.park@rotman.utoronto.ca

slides.com/ap248

sites.google.com/site/parkandreas/

youtube.com/user/andreaspark2812/

Overview of Topic 2025-26

By Andreas Park

Overview of Topic 2025-26

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