Blockchain Technolgy & Decentralized Finance Part 1

Instructors:          Andreas Park & Zissis Poulos
 

 


Rotman – MBA

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

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

  1. Money
     
  2. Safekeeping
     
  3. Deposit certificates and lending
     
  4. 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)

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

Silos vs Common Infrastructures

Illustration of Infrastructure Frictions: money transfers

Version 1: They use the same bank

Change ledger entry locally

Version 2: They use different banks but the banks have a direct relationship

Sue's bank transfers from Sue's account to Bob's bank's account

Bob's bank transfers from its account to Bob's account

Version 3: They use different banks that have no direct relationship

Sue's bank transfers from Sue's account to its own account

Bob's bank transfers from its account to Bob's account

Central Bank

Central bank transfers from Sue's bank's account to Bob's bank's account

International transfers

Sue's bank transfers from Sue's account to its own account

Bob's bank transfers from its account to Bob's account

use the Swift network of correspondent banks

Bottom Line

very complex

many parties

lots of frictions and points of failure

very expensive

Crazy thought: Wouldn't it be nice if there was a single ledger?

Existing solutions

Problem:
power concentration/Monopoly

Distributed Ledger/Blockchain Technology

  • A "joint, single system"
  • Features:
    • secure storage of information and transfer of value
    • guaranteed execution of code
  • Promise
    • open platform
    • global reach
    • frictionless finance

How does it all work and why?

How do we establish trust in commerce?

trustworthy People

long-term Relationships

reputation

contract law

institutions

What's needed for trust in  anonymous deals?

Authority

Execution

Continuity

Authority

Do you have the item?

Do you have power over it?

Tool: "key" cryptography

Execution

Can we agree that it happened?

Tool:
consensus algorithm

Security and Continuity

Are the records immutable?

restricted permissions

really difficult to hack

premise of blockchain

no trusted parties needed

everything
in code

open to
anyone

platform or network

commerce thrives

How?

@financeUTM

andreas.park@rotman.utoronto.ca

slides.com/ap248

sites.google.com/site/parkandreas/

youtube.com/user/andreaspark2812/