Title Text

DeFi & Programmable Money

David Stancel, MSc.

About me

Researching crypto since 2012
MSc in Digital Currencies
Advisor to multiple startups & institutions
- Slovak National Bank, Investment Funds
Teaching Cryptocurrencies @ FIIT STU
Co-founder Blockchain Slovakia
Co-founder of Paralelna Polis
ex Board of Directors @ Fumbi
Advisor @ Vacuumlabs
Author of Coinstory

Contact:
stanceldavid.sk

Smart Contract Platforms

TradFi vs. DeFi

Completely Transparent
- Blockchain
- Open-Source
Eliminates Middlemen
Trust-minimizing
Open and permissionless
Composable
Allows unprecedented automatization
- algorithmic finance
- programmable money
Allows things that have not been possible before
- Stablecoin with no counterparty risk
- Flash loans

Advandatges

Smart Contract Risk
- Buggy code --> loss of $
Design flaws
- Within a dapp
- When interacting with other dapps
- Unintended Consequences
Legal risks
- Who is held accountable?
- Accessing Dapps via Interface vs. Raw contract
- Fitting into existing legal framework vs. rethinking the legacy frameworks

Risks

Token Function
- Used for Governance vs collateral vs currency
Properly aligns incentives across stakeholders
The mechanism to maintain scarcity
- disinflationary vs deflationary vs burned
The mechanism to generate value
The mechanism to generate network effects

CryptoEconomics Evaluation

artificial shortage
- buyback and burn (Binance)
profit-sharing (securities!)
running the platform infrastructure
- receiving fees (Renprotocol)
network effect (Ethereum)
decentralized governance (Decred, MakerDAO)
ownership rights (NFTs, STOs)
PoS with slashing (Cosmos)
forced token utility
- In-app currency (Celsius -- hard to do)

Things that accrue value

Uniswap

Uniswap is a fully decentralized on-chain protocol for token exchange on Ethereum that uses liquidity pools (AMM) instead of order books. Anyone can quickly swap between ETH and any ERC20 token or earn fees by supplying any amount of liquidity. And anyone can create a market (i.e., liquidity pool) by supplying an equal value of ETH and an ERC20 token.

Uniswap allows only one market per ERC20 token. The market creator sets the exchange rate, which shifts through trading due to Uniswap’s “constant product market maker” mechanism. When trading reduces one side of the pair’s liquidity relative to the other, the price changes. This creates arbitrage opportunities, encouraging more trading.

Uniswap II.

Fiat-backed (Tether - USDT, PYUSD)
Crypto-backed (Dai)
Algorithmic (TerraUSD - UST)

Stablecoins

Stablecoins Market

Dai - How

First, ETH is turned into “wrapped ETH” (WETH), which is simply an ERC20 wrapping around ETH. This “tokenizes” ETH so it can be used like any other ERC20 token.
Next, WETH is turned into “pooled ETH” (PETH), which means it joins a large pool of Ethereum that is the collateral for all Dai created.
Once you have PETH, you can create a “collateralized debt position” (CDP), which locks up your PETH and allows you to draw Dai against your collateral, which is PETH.As you draw out Dai, the ratio of debt in the CDP increases. There is a debt limit that sets a maximum amount of Dai you can draw against your CDP. Once you have Dai, you can spend or trade it freely like any other ERC20 token.

Dai - Why

You need a loan, and have an asset (ETH) to use as collateral for your loan
You believe ETH is going up in value. You can use your CDP to buy ETH on margin — you lock up your ETH in a CDP, draw Dai against it, use the Dai to buy more ETH on an exchange, and then use that ETH to further increase the size of your CDP.--> without any third-party or centralized authority
The demand for Dai drives the price above $1 USD. When this occurs, you can create Dai then immediately sell it on an exchange for greater than $1 USD. This is essentially free money, and is one of the mechanisms the Maker system uses to keep Dai pegged to $1 USD. Dai being worth over $1 USD encourages more Dai to be created.

Dai - Peg Mechanism

If Dai < $1 USD, CDP owners can pay down their debt at a cheaper price!
- fe. CDP with $1000 in ETH --> draw out 500 Dai to close the position --> pay back 500 Dai (paying debt destroys Dai).
If Dai < $1 USD, then buy cheaper DAI (fe 0.99 USD) --> pay off debt with a 1% discount == free money — $500 loan (500 Dai) --> 500 Dai for $495 (0.99 * 500 = 495, a 1% discount)
--> demand for Dai increases its price, until it approaches $1 USD.
If Dai stays below $1, CDP owners continue to pay down debt and remove Dai from the system.
--> When Dai goes above $1 USD, Dai is created to feed the demand. It is this push and pull, creation and destruction, supply and demand which ensures that Dai always matches the $1 USD peg.

Dai - Taking a loan

1. Deposit ETH to Metamask

2. Wrap ETH --> WETH (via Dai.makerdao.com)

3.Exchange it for PETH (pool eth), used for collateral

4. Create CDP (the loan)

5. Lock your PETH collateral

6. Mint new DAI (max. 60% of collateral)

7. Exchange DAI for ETH

8. Send ETH to any exchange and get EUR, BTC etc.

Dai - Repaing a loan

1. Get some ETH

2. Exchange it for DAI (which you owe) and MKR (for governance fee) on Oasis DEX

3. Return DAI to the smart contract and pay the fee in MKR

4. You cancel CDP smart contract

5. Unlock your PETH

6. Exchange PETH for WETH

7. Unwrap WETH --> ETH

8. You have your ETH back