Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park & Zissis Poulos
Pool-based lending principles
Example 1
Example 2
Example 3
borrowing and lending rates compounded per block
Token Accounting:
tracking ownership
Compound
AAVE
Token Accounting: TWO Types
Fundamentally, what does a bank do?
And how is this done?
on blockchain
In Compound
translated
new deposit
1,000 DAI
100 cDAI
500 DAI
add 50 new cDAI
In Compound
translated
new deposit
1,000 DAI
150 cDAI
500 DAI
1 year later: 10% interest on compound
150 DAI
(same cDAI, ownership shares don't change, just each cDAI is worth more)
(accrues per block per deposit)
AAVE
Liquidity Mining
Flash Loans
common theme in DeFi: jumping between dApps
Source: Harvey, Ramachandran, and Santoro (2020)
1. flash-borrow DAI
5. repay DAI
3. receive ETH
4. convert ETH to DAI
2. liquidate ETH loan with DAI
Loan liquidation opportunity
Commercial Paper/T-Bill like securities
1 ETH = 150 DAI
collateralization ratio 125%
seller
buyer
supplies 1 ETH collateral today
mints (=borrows) 100 yDAI to be repaid in 1 year
y
receives 92 DAI today
pays 92 DAI today
y
receives 100 yDAI
repays loan with 100 DAI
deposits yDAI and receives 100 DAI
seller
buyer
Scenario 1: ETH ≥125 DAI
deposits 100 yDAI
withdraws 100 DAI
receives balance of 1 ETH - 100 DAI
What does the seller own (ignore keeper fee)?
seller
buyer
Scenario 2: ETH falls to <125 DAI
keeper
closes undercollateralized position → sells 0.8 ETH for 100 DAI
receives 100 DAI early
receives balance
of 0.2 ETH
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/
By Andreas Park
This slide deck provides an overview of DeFi protocols. It draws insights from Harvey, Ramachandran, and Santoro (2020) "DeFi and the Future of Finance"