What is DeFi? Overview of Topics

Presenter: Andreas Park

How does a blockchain work?

Decentralized Trading

Trading Infrastructure

payments network

Stock Exchange

Clearing House

custodian

beneficial ownership record

seller

buyer

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

Self-custody of assets
Access to financial infrastructure
Conceptually non-custodial services
Value management layer = common resource
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."

Newsletter from TD Securities Sept 4, 2025: "the tokenization of equity securities poses an existential threat to traditional equity markets."

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

The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act)

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

Does it provide scale?
Does it enable new criminal activity?
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 on Terminology

The terms blockchain and decentralized are often tossed around with various different meanings. So some thoughts.
Decentralized \(\not=\) fragmented
Blockchain \(=\) aspires to work like a single computer
\(\to\) Decentralized blockchain \(=\) common resource
Decentralized applications on blockchains \(=\) generally accessible without restrictions
blockchain \(=\) permissionless
permissioned/authorized blockchain \(=\) a very slow database
permissioned \(\Rightarrow\) attempt to replicate the existing world
non-custodial \(=\) user is in charge and bears all risks
centralized exchange \(=\) custodial exchange
regulators and lawyers hate non-custodial (who can they call? who is on the hook if things go wrong?)
regulators cannot regulate the general population and firms not on their radar

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
biggest threat of it all: crony capitalism \(=\) firm using policy makers and regulators to define rules that secure their rent-seeking