DeFi Intro

A tumultuous 12 months

The NFT Boom

"what is the real value proposition here? [...] probably nothing.”
"[...] a lot of people have grown weary of cash-grab tactics.”

The NFT Boom & Crash

The Terra Implosion

UST Stablecoin

LUNA (cryptocurrency of the TERRA network)

A timeline

May 7: selling pressure on UST from Curve withdrawals

May 12: LUNA and UST at $0.01

June 27: Three Arrows Capital ordered to liquidate

June 12: Celsius Network suspends withdrawals

July 13: Celsius files for Chapter 11

July 6: Voyager Digital files for Chapter 11

July 4: Vault suspends withdrawals

Three Arrows Capital lost >60% of value and faces numerous margin calls that they did not react to

The Aftermath:
is crypto dead or dying?

Cryptomarket Crash

bitcoin

ETH

-70%

-60%

Consequences of the Crash?

Some Questions

Are blockchains no longer used?
Is crypto investing dead?
What other effects does the crash have?

Are blockchains no longer used?

transactions on Ethereum flat

Is crypto-investing dead?

crypto market follows traditional market

Is crypto trading dead?

trading volume on exchanges lower but steady

Are markets dead?

no meaningful net outflows from exchanges

Other consequences?

less hype will
- attract less new capital
- separate grain from chuff for projects
- lower distractions
lower token prices
- make working in crypto less attractive
- make it harder for projects to pay people

Challenges

Proof of Work uses unsustainable amounts of energy

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

Usage

Network	DApps	Dollarvolume
Ethereum	3,500	$40-50B
Solana	100	$2.5B
Binance Smart Chain	250	$3B
Avalanche	400	<$.5B
EOS	300	<$100M
Algorand	12	<$20M

Ethereum Challenge 1: Environment

Carbon footprint of Switzerland
Power consumption of Austria

	transactions per second	T per 12 hours (business day)
Bitcoin	7	302,400
Ethereum	30	1,296,000
Algorand	2000	86,400,000
Conflux	4000	172,800,000
Athereum	5000	216,000,000
Payments Canada ACSS	648	28,000,000
US retail	7639	330,000,000
Canada number of equity trades	46	2,000,000
Orders on Canadian equity markets	3588	155,000,000

Tweaks: lighting network (BTC) or side chains, SegWit, blocksize possible, but there are limits
microtransactions, IoT, and other smart contract use cases place very high demands

Ethereum Challenge 2: Throughput

Source: Etherscan w re-scaling

Ethereum Challenge 3: State Size

Source: Ycharts

Major Ethereum Tech Upgrade: The Merge

scheduled date: September 13

Hacks, Thefts, and Exploits

Common Reasons: hacks, faulty code, tricking a protocol

Miner extractable value and High Priority Gas Auctions

5-minute version:
What is a blockchain?

blockchain=

an infrastructure for digital resource transfers

5-minute version:
What is a cryptocurrency?

cryptocurrency =

internal payment mechanism to pay for operation of a blockchain

Evolution

With Blockchain: single ledger for money and securities

0xA69958C146C18C1A015FDFdC85DF20Ee1BB312Bc

0x91C44E74EbF75bAA81A45dC589443194d2EBa84B

0xA65D00Eda4eEB020754C18e021b1bF4E66C9Ed90

blockchain 1.0
first solution to double spending
clunky, slow, expensive
huge following and computing power

vs

blockchain 2.0
smart contract platform
highly flexible
foundation for many private initiatives

"Let me just say how impressed I am with Ethereum...If Bitcoin is email ––a one-trick pony, so to speak, but obviously revolutionary–– Ethereum goes far beyond that; it's more like the Internet...The whole idea of DeFi really is, number one, it’s obviously revolutionary, and I think at the end of the day could lead to a massive disintermediation of the financial system and the traditional players."

Heath P. Tarbert, CFTC Chairman, October 2020

5-minute version:
What is Decentralized Finance?

decentralized finance =
provision of financial services without the necessary involvement of a traditional financial intermediary based on blockchain technology

Why should you care?

Verbal Overview: Origins of Financial Institutions

Money
Safekeeping
Deposit certificates and lending
Trade facilitation & finance

in practice: new financial infrastructure that will be a common resource

payments

stocks, bonds, and options

swaps, CDS, MBS, CDOs

insurance contracts

Application: decentralized trading

Application: Decentralized Lending

$\vdots$

dapp-linking, Defi-Legos and flash loans

Source: Harvey, Ramachandran, and Santoro (2020)

What can it for finance, what are problems and obstacles?

Usage of blockchain in financial industry

Areas of applications

moving value (remittances)

digital money: real-time settlement, reduced reserves

tokenization of assets

automization of contract payments

securitization

systems and infrastructure reorganization

digital identity

new forms of financial contracts, assets, and forms of financing

What Changes in Business Models can Blockchain Technology bring?

What does blockchain do?

peer to peer value transfers

self-powered platforms

contract execution

disintermediation

Who do you dis-intermediate, and then who is your customer?

issuer

investor

broker-dealer

The Business challenge of dis-intermediation

investment advisor

Private Sector Solutions

Private vs. public

some key questions

Who gets to update?

Can a higher body prevent
transactions?

Can the past be altered?

consensus

immutability

censorship resistence

Public Blockchains provide

Main private blockchain systems

Features of Private vs. public blockchains

open to anyone

no one can be excluded

past cannot be changed

Public Blockchains

private Blockchains

high visibility of transactions

open-access eco-system

slow governance

privacy only at a cost

joint control and governance

straightforward KYC and AML

tech support

transaction secrecy simpler

rely on corporate development

compliance with law (reversion)

can keep competition out

Enter BigTech

cellphone data from 2018 (NewZoo), inflation from 2020 (World Population Review)

Evolution

DIEM = "new financial infrastructure"

Why does BigTech enter the finance game?

They have ZERO interest in becoming a financial institution/bank

$\rightarrow$ no expertise

$\rightarrow$ competitive market

$\rightarrow$ one of the most regulated business environments

My take

They are trying to deal with frictions that impede their business

They aim to collect data which will vastly improve their business

Lay the groundwork for the next step of the digital evolution: the "Metaverse"

Key Challenges for the blockchain Community for 2019

Technology

Legal/Regulation

Economic functions

What is the right governance structure for systems?

How should we design tokens as contracts?

How do platform payment means interact with outside world

How much do we have to pay operators to maintain the chain?

Key Economic Questions for Blockchain Design

Key Technology Questions for Blockchain Design

interoperability

cybersecurity and privacy

functionality

scalability

smart contract features and verification

space constraints

Solution projects to Key Technology Questions

interoperability

scalability

space constraints:

Does the law have to change to accommodate new tech? If so, how? What's dated, what's not?

Key Legal Questions for Blockchain Design

Legal setup of a platform: what rules can, should, and must a platform establish? What regulations are necessary?

How can token design and the law be married?

Questions for the future

What is the economic impact of "tokenizing everything"?

How will it affect investments and investment banking?

Which business opportunities will it enable?

What do tokens and "alternative money" mean for payments?

Future of Crypto: Regulators

Presidential Executive Order
- instructs several branches of government to develop rules around crypto assets
- comments still open
Regulatory competition
- SEC and CFTC quibble over who gets to regulate crypto-assets
- Gensler: "bringing regulation into the political fold"
SEC regulation by enforcement
- charged Coinbase executives with insider trading of unregistered securities
- $\to$ makes these crypto-assets securities
- goes around the usual process (e.g., no comments)

United States

Treasury’s Office of Foreign Assets Control (OFAC) action against Tornado Cash = a mixer:
- inbound crypto assets into pool
- outbound to different address
used by Lazarus Group, fraudsters and thieves
Not gone, only website off $\to$ many regulatory compliance questions

Most relevant case for FIs: Tornado Cash

Raises many questions
- Privacy?
- Culpability for code?
- OFAC sanctions for miners or validators for processing TC transactions?
- Compliance guidance/obligations for apps?
- Rules for FIs that offer blockchain services?
- Note: there are third-party risk mitigation providers (e.g., Chainalysis)

Stablecoins
- create certainty and safeguard for the redemption process and disclosure for fiat-backed stablecoins to avoid spillovers
NFTs
- create legal framework to link ownership of items to NFTs
Capital raising
- create certainty for capital raising activities for items that are available to public by default
Decentralized Autonomous Organizations
- define rules around DAOs
Tokenization
- develop a framework that allows issuers to tokenize their existing securities

Need for Regulation

Tax regime
- create a reasonable tax regime for crypto-asset users (as opposed to investors)
Digital economy
- adapt regulatory processes to the digital economy
Privacy rights and limitations
- create a framework to provide users with certainty on their rights to protect their privacy

quick comparison

FinTech vs. Defi

FinTech

DeFi

more user-friendly UX
more customer-oriented
less squeezing/rent-extraction
more competive services
more innovative services

currently: horribly user-unfriendly
"blowing up the banks"
fundamental re-thinking of financial services
lots of scams, cowboy-attitude towards laws

innovation vs. salesmanship

main focus

Conclusion and final thoughts

blockchain is a transformative technology, but won't be used in practice overnight

many conceptual and technological challenges remain, but there are already various areas of application

legal, regulatory, and competitive changes are needed and then the opportunities are endless ...

it will open up the banking world further, foster international competition, and change how we pay and exchange value

My view: business development will happen in private/semi-public space; strong increase in recent activity; no more testing but re-engineering of processes.

Blockchain Technolgy & Decentralized Finance