Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park
payments network
Stock Exchange
Clearing House
custodian
custodian
beneficial ownership record
seller
buyer
Broker
Broker
Broker
Exchange
Internalizer
Wholeseller
Darkpool
Venue
Settlement
(307 CEX, rest DEX)
approx:
400B p.m.
approx:
700B p.m.
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy BTC
sell BTC
move BTC to Kraken
Crypto Wash Trading, Lin William Cong, Xi Li, Ke Tang, Yang Yang
What is pump and dump?
arranged via Telegram Channels
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.
the "normal-times" returns
By yours truly, Dec 2017: "What really concerns me about the current craziness is the role of the cryptocurrency exchange platforms, such as Coinbase, Quadriga, or Bitfinex, which most people use to buy Bitcoins. These are like banks that hold deposits. For cryptocurrencies to succeed it is critical that these interfaces with the real world are financially robust. Are they? Do they have all the Bitcoins they sell? Can they always satisfy depositors’ demands?"
Source: https://vitalik.ca/general/2022/11/19/proof_of_solvency.html
seller
buyer
New institutions!
invariant \(k=4\times4=16\)
Instantaneous exchange rate:
1 = 1
Contract deposit:
sell 4 DAI for USDC
what price will therefore be quoted?
how many USDC?
Problem: large "slippage" (or price impact)
\(X-Q\)
\(X\)
\(Y+P(Q))\)
\(Y\)
\(c=X\cdot Y\)
Does it matter economically?
\(X-Q'\)
\(X\)
\(X-Q\)
\(X-Q'-Q\)
receive \(-P(-Q|X-Q'-Q)\)
pay \(P(Q)\)
\(P(Q'|X-Q)\)
\(Y\)
\(Y+P(Q)\)
\(Y+P(Q')\)
\(Y+P(Q)+P(Q'|X-Q)\)
\(P(Q')\)
Example: Feb 2022, ETH-USDC trade
a
b
c
d
e
f
g
Option |
Exchange-side risk |
User-side risk |
Custodial exchange (eg.Coinbase today) |
User funds may be lost if there is a problem on the exchange side |
Exchange can help recover account |
Non-custodial exchange (e.g.Uniswap or dydx today) |
User can withdraw even if exchange acts maliciously |
User funds may be lost if userscrews up |
Source: https://vitalik.ca/general/2022/11/19/proof_of_solvency.html
\[\begin{array}{rcl} DL(P_0,P_1)&=&P_1(X_0-Q)+Y_0+P(Q)-(P_1X_0+Y_0)\\ &=& P(Q)-P_1\cdot Q \end{array}\]
quantity
price
\(Q\)
\(p(Q)\)
\(P^{\mathsf{dp}}(Q)=\int_0^Qp(q)~dq\)
Gamma Distribution
Constant
product
worse
Constant
product
better
Log-Normal Distribution of Returns
Constant
product
is always worse
By Andreas Park